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Is Google, Inc Stock A Buy?

By Tim Brugger - May 10, 2015 at 11:31AM

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Despite another solid quarter, the search king’s stock price continues to meander.

When you're Google (NASDAQ: GOOG) (NASDAQ: GOOGL), narrowly missing earnings estimates -- as it did in Q1 -- is cause for concern. Consistently generating double-digit sales growth should be cause for celebration, but if Google's stock price decline since announcing earnings on April 23 is any indication investors were not amused.

Concerns about declining Cost-Per-Click (CPC) rates, spending on far-flung innovations like Glass, and competition from upstarts like digital advertising superstar Facebook (META -5.20%) are putting pressure on Google's stock price. And that should be music to the ears of long-term investors, because Google has a number of arrows in its quiver that will continue to drive growth long into the future.

A quick recap
Analysts expected Google to report earnings of $17.5 billion and non-GAAP (excluding one-time items) earnings per share of $6.60 -- both big jumps over the prior year's results. Alas, Google generated a "mere" $17.26 billion in sales -- a 12% improvement from 2014's Q1 -- and $6.57 per share in non-GAAP earnings, or about 5% better than last year. If not for "foreign currency headwinds," as per Google CFO Patrick Pichette, revenues would have climbed 17% to over $18 billion.

Spending played a big part in Google's less-than-stellar earnings-per-share growth as the company continues to build out infrastructure, develop enhanced mobile search tools, and invest in new facilities. Last quarter operating expenses increased over $1.1 billion to $6.46 billion, or 37% of total revenues vs. 35% in 2014.

An area of ongoing concern is Google's CPC rate declines. CPC rates dropped 7% on an aggregate basis, and a whopping 13% on Google sites. Pichette attempted to diffuse the CPC rate concerns by suggesting that YouTube's "skippable" ads were largely to blame, as they brought down the overall CPC rates. True or not, there's no denying analysts zeroed in on click rates, and investors appear to have followed suit.

A bevy of growth drivers
Granted, Google does have difficulty letting go of unsuccessful innovations like its Glass initiative. Despite little to no chance of widespread consumer adoption, Google CEO Larry Page refuses to admit Glass is a dud, and that stubbornness leaves some industry insiders feeling frustrated -- and rightfully so. However, Google has a number of legitimate innovations that will drive topline growth.

At $20 a month and $10 per gigabyte used, Google's new wireless service is a breath of fresh air in the Wi-Fi space. Google's wireless plan is yet another means of providing the world's mobile consumers with what is quickly becoming an end-to-end suite of online solutions. Already, over half the world's mobile web access is via an Android OS device, and its new wireless plan will add to its increasing market share. Now, toss in its Fiber initiative, and Google is primed to become an end-to-end Internet solution.

Wireless plans, Fiber, and its dominant mobile OS market share make it virtually certain Google will continue to dominate the digital ad market. Yes, Facebook is growing as fast, if not faster, than Google, but it remains a distant second to the king of online advertising.

One of the key drivers of Facebook's growth -- and why many consider it a legitimate long-term threat to Google -- is its foray into video. At $1 million a day to simply partake in Facebook's video ad testing phase, it's clear advertisers recognize the value of video spots.

As it happens, Google owns the leading video site in the world. With over 1 billion users and growing 50% monthly, YouTube is a goldmine of revenue just waiting to happen. Yes, it's already growing and becoming a larger part of Google's overall sales, but YouTube is still in its revenue infancy, and that's great news for long-term investors.

Google's "other revenues" are also worth noting as well. At $1.75 billion, other revenues -- which includes Google Play and cloud sales -- are growing by leaps and bounds. Last quarter's 23% jump in "other" sales nearly doubled that of Google's total revenue growth. And with apps becoming a mainstay of mobile users, and cloud sales expected to explode, Google stands to reap the benefits for years to come.

For long-term investors, Google has too many growth drivers to ignore. Sure, short-sighted industry pundits will continue to focus on declining CPC rates and mobile "concerns," but that's fine: that's exactly why Google is such a bargain.


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