The Motley Fool Previous Page

This Tech Giant Continues to Beat Expectations

Steve Heller
January 24, 2013

Google (NASDAQ: GOOG) continues to impress investors. On Tuesday, the company reported strong fourth-quarter earnings, driven by a 36% increase in year-over-year revenue growth. If that doesn't impress you, Team Mountain View reported an 8% sequential increase in revenue since the third quarter, driven primarily by an increase in aggregate paid click volume. We are living in an era where users have multiple screens connected to the Internet, which CEO Larry Page believes poses a tremendous business opportunity for Google in the years ahead.

Paid clicks grow
Since the fourth quarter of last year, the aggregate number of paid clicks grew by 24%, thanks largely in part to more connected screens. Sequentially, aggregate paid clicks rose by 9%, further enforcing the belief that the multiscreen premise remains intact. As an investor, it's important to see Google generating an increased volume of clicks for its business, but this is only one side of the story. Increased clicking does not matter if the clicks aren't worth as much.

CPC stabilizes
Now going on five quarters, Google's cost-per-click, or CPC, continues to decline. Smartphones and tablets have less screen real estate than traditional PCs, giving Google fewer opportunities to make money. As a result, less advertising dollars are allocated to these platforms, driving CPC down with it. Aside from mobile, there's a host other factors affecting CPC rates, including currency fluctuations, emerging markets, the macro environment, versus its ad network, and the overall quality of the ads. Combined, these factors drove CPC to fall 6% from the fourth quarter of 2011, but actually rose by 2% sequentially. Adjusting for currency fluctuations, CPC was down 4% year over year and up 1% sequentially.

The factors negatively affecting CPC appear to be stabilizing, especially when you consider that the 6% year-over-year drop in CPC is the lowest Google has seen in five quarters. If this were the case, it would be a very encouraging development for investors.

Traffic acquisition costs ease

Source: Google quarterly earnings press releases. Dollar figures in billions.

Traffic acquisition costs, the portion of Google's revenue that's shared with its advertising partners, has been steadily on the rise over the last 12 quarters. There has been a growing fear that Google has to spend a larger percentage of its revenue to drive traffic through its domain, which would be problematic for its profit margins. Thankfully, TAC as a percentage of revenue backed off by 1%, easing fears that Google isn't growing faster through its partner network than it is organically. This improvement can be attributed to Android OS' massive 75% market share as well as continued stre