Whether or not Google (GOOG, GOOGL) had a disappointing first quarter is largely a matter of perspective.
The bad news: Earnings of $6.27 per share of Google stock fell short of the expected $6.40. Analysts were looking for a top line of $15.5 billion, but the search engine giant only drove $15.4 billion in revenue.
The good news: That profit of $6.27 per share was 4.5% stronger than the year-ago comparable figure of $6, while the top line of $15.4 billion in Q1 absolutely trounced sales of $12.95 billion from the first quarter of 2013.
And thus continues the great earnings conundrum: What credence do we give estimates that may be nothing more than wild, hopeful guesses?
The market deemed first-quarter Google earnings estimates more important than rather impressive growth, judging from the fact that Google stock is down more than 3% this morning.
Given time, however, that mentality might bend to the company’s longer-term reality.
Apples and Oranges
The introduction of Google Glass, the impending sale of Motorola to Lenovo (LNVGF) and the advent of Google Chromecast have all captured the hearts and minds of Google stock investors as well as the media. But when it’s boiled down to basics, GOOG remains predominantly a paid-search and display-ad business.
And once again, perceived problems on that front spurred Wednesday evening’s weakness.
Oh, Google can still draw a crowd, with the number of paid clicks growing 26% from the numbers of clicks GOOG induced in the first quarter of 2014.
What’s wrong with that?
Well, the price paid for those clicks (i.e. Google’s ad revenue) continues to deteriorate. This time around, that cost-per-click was 9% lower than the comparable quarter’s cost-per-click, or CPC. That wasn’t as rough as Q4’s 11% dip in the prices Google commanded with its ad business, but it’s still a sizable deterioration.
The reason for the waning efficiency: The ongoing migration of consumers from their desktops to smartphones and tablets, where folks behave a little differently. Specifically, with the screen of the average handheld device being much smaller than that of a desktop or laptop, browsers are less apt to even see an advertisement to click on it in the first place.
And, with mobile searches generally being more purpose-driven and deliberate versus more of a wandering, social mentality from those surfing the web from a desk in front of a home or office computer, mobile users aren’t as easily distracted by an ad or as curious to click on a related link.
For instance, the results of a study performed by Experian Marketing Services last year found that the greatest percent of the time mobile users spent online with their device — 23%, to be exact — was to check their e-mail. Conversely, only 5% of the time on a desktop or laptop is used reading or sending e-mails.
The bulk of desktop/laptop time online (27%) was spent on social networking. That figure was only 15% for mobile web surfers.
Google Stock: It’s All About Advertising
For perspective, Google has grown its top and bottom lines every year for more than a decade now. It hasn’t been feeble, half-hearted growth either. Revenue has grown from only $1.46 billion in 2003 to $59.8 billion last year ($55.6 billion if you want to back out Motorola). Income has grown from $105 million in 2004 to $12.9 billion in 2013.
That’s not a fluke. There’s a reason Google has become the dominant name in search and has consistently grown at a double-digit pace since its inception, and why Google stock has climbed so hard, whether or not it’s hit or missed quarterly analyst expectations along the way — Google just knows what it’s doing. Focus on the growth, and not the shortcoming.
Yes, Google stock holders would love it if the company could milk its mobile ad business a little better and improve its cost-per-click metrics.
Just for the record, though, Google isn’t the only organization struggling to get better yields from its mobile platform.
Facebook (FB) and Yahoo (YHOO) have both found that mobile users aren’t as fruitful in terms of ad revenue as desktop and laptop users are. That’s not a problem, per se … it’s just a reality. Google is still the king of that particular castle, owning most of that advertising market share because it owns the medium, in Android.
Any chance that these click metrics could be crimped by the proliferation of programmatic advertising — organized exchanges used by Internet advertisers to make the ad-buying process more efficient and cost-effective?
Maybe a little, but it might be worth it. While these programmatic ad exchanges can lower the average price of a click, the fact that Google is not fighting these exchanges, but actually facilitating them suggests any drawbacks to their existence are more than offset by any upside. Again, while last quarter’s CPC was down 9%, the 23% increase in clicks and the subsequent revenue growth more than makes up for it.
Here’s the litmus test: If you were going on a 10-year mission into outer space and wouldn’t be able to trade while you were gone, but you could only pick one technology stock to hold in your portfolio while you were gone, which stock would that be?
I have to believe Google stock would the answer for the vast majority of those cosmos-bound investors.
That exercise, as silly as it sounds, tells you most of what you need to know about Google’s long-term growth prospects.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.