Look Past the Google Earnings Headlines — You Might Like What You See

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The initial headlines painted a grim picture shortly after Google Inc. (NASDAQ:GOOGL) unveiled its previous quarter’s results Thursday evening.

goog google stock earnings stockGOOGL stock immediately tanked in after-hours trading, following the post-close announcement.

A funny thing happened on the way to even more losses for current Google shareholders, though … investors took a closer look at the numbers, and by the time the conference call was over, the after-hours price of Google stock was up a respectable 2.2%.

Why the wild swing? The dip and the follow-up bounce roughly reflect the amount of time it took traders to move from the income statement — which was disappointing on the surface — to the details of how Google drove those numbers. As it turns out, investors may be seeing things the wrong way.

Google Earnings

In the fourth quarter of 2014, Google mustered $18.1 billion in gross revenue, short of the $18.45 billion analysts were collectively expecting. That’s still 7.1% stronger than the top line reported for the fourth quarter of 2013, however. Accounting for traffic-acquisition costs, the company generated $14.5 billion in sales in Q4, short of estimates of $14.7 billion.

It should be noted that the gross top line of $18.1 billion would have been closer to $18.6 billion had an inordinately strong U.S. dollar not crimped the marketability of its advertising business (and that’s with the company’s currency hedging efforts).

As for earnings, Google banked a profit of $6.88 per share of GOOGL stock, short of the expected $7.08 per share. Again though, the per-share earnings figure was stronger than the year-ago total of $6.01. Earnings grew to the tune of 15%.

It’s All About the Costs Per Click

Whether the top and bottom lines were encouraging or discouraging is largely in the eye of the beholder. Growth is growth no matter what, but missed expectations are missed expectations. Unfortunately, the other metrics most GOOGL stock investors keep tabs on were equally mixed.

One of those measures is the cost-per-click (or CPC) that Google collects whenever a web browser clicks on one of its advertisements. That figure fell 3%, on a year-over-year basis as well as a quarter-over-quarter. Although lower per-click revenue isn’t a new problem, this setback was something of a surprise in that modest improvement Google had been seeing in the prior three quarters.

Google has seen year-over-year CPC levels fall for thirteen consecutive quarters now, even though the declines had been well contained in the prior three quarters.

Although Google is pocketing less each time an ad is clicked, the company is driving many more clicks now that it has figured out how to maximize mobile traffic. In the fourth quarter, the total number of ad clicks was up 14% on a year-over-year basis, and up 11% on a quarter-to-quarter basis.

That’s actually the weakest year-over-year growth rate in paid clicks in years, but the strongest quarterly growth rate of paid clicks since the fourth quarter of 2013. The implication is that whatever magic formula Google figured out to encourage more ad-clicks — particularly on mobile devices — it has just figured it out within the past few months.

These results bode well for similarly strong YOY increases in the coming three quarters.

Bottom Line for GOOGL Stock

While the Google earnings announcement and conference call were interesting as always, they’re still not the whole story. What wasn’t discussed (even in the Q&A portion of the conference call) was the market share Google is slowly losing to Facebook.

Take the numbers with a grain of salt, because they’re just estimates, but internet commerce analytics firm eMarketer believes Google is losing mobile market share to Facebook (NASDAQ:FB). Granted, Google already dominates the market, earning almost 50% of 2013’s mobile advertising business versus Facebook’s 2013 share of less than 18%. But eMarketer aptly reports that Facebook controlled nearly 22% of the mobile advertising market in 2014, while Google’s portion fell to less than 47%.

Still, while investors should continue to bear in mind that all big trends start out as small one, they should also bear in mind that the bottom line is the bottom line. And for Google, the bottom line has been growing freakishly reliably for a decade now, even if margins are contracting slightly.

Indeed, contracting margins are mostly a result of capital expenditures aimed at ventures that aren’t highly visible to the average consumer at this point in time.

With $68 billion in the bank and some of the smartest people in the world spending it, though, Google’s bound to come up with some new things that are more than satisfactory to investors getting a little bit restless now.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/01/google-stock-earnings/.

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