Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) stock surged on Friday, adding 3% in early trading despite missing on first-quarter earnings per share and consensus revenue expectations. What gives?
We’ll get to that in just a second. But before deconstructing exactly why GOOG stock is trending higher today, investors should simply sit back and enjoy the good news.
After all, GOOG has been a laggard over the past year, over which Google’s meager returns (4% before today’s gains) have trailed all its major peers:
- Facebook Inc (NASDAQ:FB) stock rose 35% in that time.
- Apple Inc. (NASDAQ:AAPL) stock was up an incredible 63%.
- Microsoft Corporation (NASDAQ:MSFT) tacked on 12%.
- Even the S&P 500 added 15% over the past year.
Something’s wrong with that picture. But don’t worry, that won’t last long.
GOOG Earnings: Technically Subpar, Actually Not Bad
Analysts expected GOOG to haul in $14 billion after traffic acquisition costs; instead they came in at $13.9 billion. Non-GAAP EPS also came in below estimates, clocking in at $6.57 against consensus $6.61 estimates.
So why the rally today?
Two big factors helped drive GOOG stock higher:
1) The fact that most of Google’s miss can be chalked up to a robust U.S. dollar that diluted international results, and
2) A deceleration in headcount growth, which is a solid gauge of future operating expenses.
There’s pretty much just one number GOOG investors need to know about the first point: $795 million. From Google’s first-quarter earnings announcement:
“…had foreign exchange rates remained constant from the first quarter of 2014 through the first quarter of 2015, our revenues in the first quarter of 2015 would have been $795 million higher. Additionally, our constant currency revenue growth in the first quarter of 2015 was 17% year over year.”
In other words, GOOG would have breezed past Wall Street’s revenue expectations if it weren’t for that pesky strong dollar. Bernstein analyst Carlos Kirjner explained in a note this morning that “we think only a portion of Street analysts updated their models for FX approppriately,” meaning consensus expectations were artificially high and didn’t reflect foreign exchange considerations.
Kirjner went on to explain why a deceleration in headcount growth was important to GOOG investors:
“We think headcount growth is a reasonable indicator of future opex evolution and believe that for operating income to grow in the mid-teens, Google’s headcount has to grow slower or on par with its gross profit dollars.”
The analyst later added:
“While the rate at which Google increased employees outpaced gross profits growth significantly in H214, this was not the case in 1Q15, as the two converged. The total number of headcount additions was significantly lower than what we saw in every quarter of 2014, and as a percentage of the total employee base, QoQ additions were at the lowest level in two years.”
Bernstein rates GOOG stock an “outperform” with a $650 price target, implying upside of about 13% from current levels. With incoming CFO Ruth Porat bringing her Wall Street expertise to Google straight from Morgan Stanley (NYSE:MS), GOOG should be equipped with some degree of fiscal restraint in upcoming years.
Let’s hope Google’s post-earnings rally becomes a tradition.
As of this writing John Divine was long shares of GOOG stock, GOOGL stock and AAPL stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
