Editor’s note: This column is part of our Best Stocks for 2015 contest. Paul R. La Monica’s pick for the contest is Google Inc. (Nasdaq:GOOG).
Google hasn’t had a great year. GOOG stock is still up more than 1% for year to date, but it’s lagging the Nasdaq by two percentage points. It’s also trailing Facebook by three percentage points and Apple by the slight margin of 12 percentage points.
Part of the problem may be the fact that Google famously does not provide Wall Street any earnings guidance. And analysts had been getting too bullish, which turned out to be a great setup for disappointment.
Google’s fourth-quarter earnings came in below forecasts. That’s the fifth consecutive earnings miss for the company. But investors may have finally figured out that it’s time to stop putting out pie-in-the-sky forecasts for GOOG stock.
Earnings estimates for the first quarter, fiscal 2015 and even 2016 have been reduced over the past few months. However, those lowered estimates could actually turn out to be a good thing. They may make it easier for GOOG stock to finally start beating consensus forecasts again.
GOOG Stock Prefers Growth to Earnings Beats
But even if Google doesn’t beat the Street, it’s important to remember that this is still a fantastic company. Over the long haul, companies get rewarded for absolute earnings growth, not relative performance.
Even though Google’s fourth-quarter profits failed to meet analysts’ expectations, earnings per share still surged from $4.95 in Q4 2013 to $6.91 — a gain of 40%. That’s impressive growth for a company as large as Google.
If you had a choice, which company would you choose: One that continues to report earnings increases in excess of 15% but misses wildly optimistic forecasts? Or one that keeps reporting losses but beats expectations by losing less than expected?
I don’t know about you, but I’d much rather have the company that’s actually growing.
Google continues to be the leader in digital advertising, and it’s extending that to mobile as well. And it has $64.4 billion in cash and short-term investments — a massive war chest that will allow Google to keep investing in new areas in technology as well as make more acquisitions.
Google has — with the exception of Motorola Mobility — a pretty impressive track record of dealmaking, picking up winners like YouTube, DoubleClick and Android. And it’s probably going to keep shopping — especially after hiring Wall Street veteran Ruth Porat from Morgan Stanley to be its new CFO.
So don’t focus on the short-term results at Google. Keep your eye on the long haul. After all, that’s what the company is doing. And it’s a strategy that has served GOOG stock very well since its IPO in 2004.
As of this writing, Paul R. La Monica did not hold a position in any of the aforementioned securities.
