Google Inc's Earnings Confirm Its Moat Is Stronger Than Ever

Google's (NASDAQ: GOOG  ) been performing very well. The divestiture of Motorola Mobility benefits Google's robust margin profile. The company's market leadership positions in search, online video, and mobile operating systems are stronger than ever, and they will drive the company's stock price higher in the future.

Margin expansion
In the last quarter, Google's top line increased 19% year-over-year to $15.4 billion. Google's operating margin in the last quarter stood at 27% for a sequential increase from the prior quarter when the margin was 23%, which primarily resulted from the sale of Motorola Mobility.

Google's pre-tax earnings for the first quarter of 2014 stood at $4.47 billion and its diluted EPS stood at $5.04. The company ended the quarter with $59.3 billion in cash and securities. The company's revenue flows are reasonably diversified with 57% of its total revenues coming from outside the U.S. 

Google sold off Motorola's smartphone business to Lenovo Group in the last quarter for $2.91 billion. However, Google will retain the vast majority of Motorola's patent portfolio. Since Motorola's business was operating in the red, the divestiture of Motorola will expand the company's margins going forward. 

Strong market positions
Google's paid clicks, which refers to the number of ads Google sells through various websites, increased 26% year-over-year. However, its cost-per-click declined 9% year-over-year. The company is selling many more ads on sites that it owns as well as websites owned by its partners, but the price-per ad is going down as Google portrays more ads on mobile devices. Google's CFO stated that in the future the company will break down its paid-clicks and cost-per-click numbers by source, and this will provide incremental clarity to investors and analysts. 

Google's other revenues, which include digital sales from the Play Store, increased 48% year-over-year to $1.6 billion. As Android ramps up its market share in the mobile OS market across the globe, Google's Play store should see robust revenue growth from content and app sales. 

In the fourth quarter of 2013, Android's market share stood at 78.1% and  Apple's iOS held market share of 17.6%, according to IDC.  The combined market share of Apple's iOS and Google's Android stood at more than 95.7%, which pretty much makes the market for mobile operating systems a two-horse race. Further gains in market share by Android will lead to continued growth in revenues from Google's Play store. 

Google's development of Enhanced Campaigns has helped its advertising clients get more information about their marketing campaigns, and this should lead to higher budget allocations to various sites owned by Google and its partners. YouTube attracts more than 1 billion users to its platform, and this has been very appealing to large brand advertisers which had mainly been focusing on video ads, primarily on TV.

Newer streams of revenue
Google's acquisition of Nest Labs will lead to a newer stream of revenues for the search giant. Google paid $3.2 billion for Nest, which makes home technology products like thermostats and smoke alarms. 

In addition to the purchase of Nest, the company has plans to diversify its revenues further. The company's Google Fiber project has been operating in three mid-sized cities, and Google is now considering expansion plans for Fiber in up to 34 cities. The company has ample financial resources to fund a much broader roll-out in the future, and this high-speed Internet business could become a significant contributor to Google's revenues.

Bottom line
Google's market-leading positions in search, online video, and mobile OS represent very strong competitive advantages for the company. The company has ramped up its measurement capabilities for the advertising campaigns portrayed by leading marketers around the globe, and this should attract more ad dollars.

In the longer term, higher pricing on mobile ads will drive a lot of growth in Google's future revenues. As consumers spend much more time on mobile devices, the company can expect higher mobile ad revenues. Relatively new business lines like Nest and Fiber will help Google diversify away from its heavy reliance on advertising dollars.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 21, 2014, at 12:19 PM, zippero wrote:

    Google's rapidly declining free cash flow defeats the purpose of any revenue or GAAP net income growth. 70% of Goog's high-margin advertising profits go to low-margin cloud data centers now, and these capex requirements are a permanent, ongoing expense for Google now. Google grew rich and famous from monopoly search with healthy pricing power and very low capex requirements, not from low-margin, capital-intensive cloud data centers with no pricing power and daily price wars with AMZN, MSFT, etc.

  • Report this Comment On April 24, 2014, at 9:24 AM, gristan wrote:

    Hey, Ishfaque, Have You Sold Your Soul to DEVILS ?

    Or, Are You ReaLly FOOL ENOUGH TO WRITE SUCH BOGUS DEMAGOGUE ARTICLE ?

    HEY, YOU WALL STREET LACKAY OF VILLAIN, WHY ARE YOU SO GENEROUS AND LENIENT With Google, While SO HARSH Against Apple ??????

    Google Big Missed Q3 Earnings Analysts Consensus Estimates

    Google Reported Revenue ex-traffic Acquisition costs of $11.33 billion, well below the Wall Street Estimates at $11.9 billion.

    Non-GAAP EPS of $9.03 a share was down from $9.72 a year ago, and DRAMATICALLY BELOW The Street Consensus at $10.65 a share.

    Non-GAAP operating margin plunged to 27%, from 37% in the year ago quarter.

    While revenues were strong, EPS missed TAC as a percentage of revenue increased, MARGINS SHRANK and Cost-per-Click was DOWN.

    SOMETHING VERY CRUCIALLY DESTRUCTIVE TO THEIR CORE BUSINESS IS HAPPENING !!!!!!

    There were problems elsewhere on the balance sheet as well, namely in Google's Core Department : SEARCH.

    Cost-per-click was down by nine percent annually, although it was flat sequentially.

    And "Click Prices Declined for the Fourth Consecutive Quarter after Rising for Eight Consecutive Quarters before then, " he said. "That's a VERY VERY NEGATIVE. This is the mobile problem. "

    Google IS DOOMED !!!!!!

    HA, Ha

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