Anyone who owns Google stock because they think it’s a pure growth play may want to start accepting the reality that it’s en route to becoming just another large-cap company, and dealing with old-school problems (like sheer size and market saturation), which GOOGL investors have never had to contend with before.
The Google earnings report due on Thursday may well mark the pivot point of the inevitable transition.
Don’t get the wrong message. Google stock will still be a growth stock just by the nature of its business and the fact that old habits are hard to break. The rhetoric from the company, however, has decidedly shifted, and GOOGL investors would be wise to take note.
This Is Not Your Father’s Google Stock
Remember, not so long ago, when Google earnings reports were showing top-line growth of 34% and bottom-line growth of 30%? That was 2010. Although still impressive year in and year out, the growth rates of both sales and income have steadily tapered ever since, to only 19% and 12% last year.
Were it any other company, such a slowdown would be more alarming than it is for Google. Owners of Google stock who really understand what’s happening here, however, understand that waning revenue and earnings growth isn’t the result of poor leadership and deteriorating competitiveness. It’s just the reality that Internet advertising — which is still Google’s bread and butter — is becoming less and less profitable as the market becomes more and more saturated.
The evidence? In 2012, paid click (a measure of web-advertising demand and activity) growth for Google was habitually above 30%. Now that growth rate is habitually below 20%, and still trending lower.
The new reality forced CEO Larry Page to make a concerted, and admitted, effort to do something nobody who owns GOOGL has seen in earnest before — containing costs. Specifically, it’s curbing the number of new hires by essentially forcing the company’s various division heads to make a justifiable fiscal case for incurring the added payroll expense.
It’s a far cry from the “whatever you need” hiring mentality Google boasted not that long ago, when free haircuts, free food, time in the ball pit and tons of money were just some of the perks the company offered to make sure it always had the talent pool it needed.
Now here’s the real shocker: CEO Larry Page explicitly compared some of his cost-containing ideas to those employed by “King Value” himself, Warren Buffett, in his management of conglomerate company Berkshire Hathaway (BRK.A, BRK.B).
Such a comparison was unthinkable just a few years ago.
Google Earnings Preview
It’s an important idea for current GOOGL investors to grasp heading into the Google earnings report and conference call for Q2 due on Thursday, after the market closes, since some of the discussion and priorities could be a little unfamiliar. It’s all part of the maturation process.
To that end, while growing at a slower pace, the company is still projected to remain solid and plenty profitable.
As of the latest look, Google is expected to post a second-quarter profit of $6.70 per share on $17.75 billion in revenue. That’s 10.2% better than the earnings of $6.08 per share of Google stock earned in the same quarter a year ago, and 11.3% stronger than the revenue total of $15.96 billion Google achieved in the second quarter of 2014.
The full-year figures are expected to grow similarly. Just for the record, though, Google missed earnings estimates for six straight quarters, even though year-over-year earnings grew all six times.
While the numbers will tell a big part of the story, investors may be best served looking for certain subtle hints within the Google earnings call. Specifically, Google needs to make a convincing case that it knows how to stop the slow degradation of cost-per-click prices, and/or it needs to start monetizing some of the smaller projects it’s been working on while everyone waits for bigger projects like driverless cars and drones to bear fruit.
Indeed, the need for a happy medium in the interim became even more crucial as of last month when AOL dropped Google as the backbone for its search functions, and instead teamed up with Microsoft (MSFT) to let Bing fulfill AOL’s search needs. As part of the new pact, AOL will take over sales of Microsoft’s display ad business, which may well make it an even more formidable opponent to Google.
Bottom Line for GOOGL
To be clear, Google isn’t going anywhere anytime soon. It’s one of the pillars of the web, and quickly becoming an important piece of the consumer-technology landscape.
It’s also nearly a 20-year-old organization, though, and smack dab in the middle of a business — the Internet — that may have matured faster than any other industry in history. By necessity, Google has to rectify its market with its own size and age. It’ll be interesting to see just how far and how quickly Google can do so.
More relevant right now, however, is the fact this paradigm shift may start to become clear, even if modestly, in the wake of its earnings news.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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