Google earnings are OK. Just OK

01/22/2013 7:58 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Today after the close of the New York markets, Google (GOOG) reported fourth quarter earnings of $10.65 a share, 9 cents a share better than Wall Street estimates. Revenue rose 49.6% from the fourth quarter of 2011, but that still fell short of the Wall Street consensus of $12.36 billion.

But as always with Google, if you want to know how the business is really trending, you need to look at some metrics very specific to the Internet search giant.

On the plus side this quarter, aggregate paid clicks climbed 24% from the fourth quarter of 2011. That’s a huge turnaround from the 33% decline in clicks in the third quarter. The holiday shopping season was very, very good to Google.

But Google does continue to have a rate problem. The average amount that advertisers paid for a click dropped by 6% in the period. That’s better than the 15% decline in the third quarter, and it does represent a 2% increase from the third quarter, but considering that the fourth quarter is the strongest advertising quarter of the year, I’d say that Google still has a problem here.

But it’s hard to say how big a problem is. As in past quarters the cause of the problem was the fast growth of mobile search. Adds on mobile devices carry a lower price per click—about half as much—as those on desktop platforms so as ad traffic increases on mobile devices, the average price per click paid by advertisers falls. (The share of Google’s clicks coming from desktops has fallen to 73% from 77% in the last six months.) If, however, the price per click is falling slowly enough but the number of clicks is climbing fast enough, Google could wind up on the right side of the mobile trend the trend even as the price per click is moving lower.

The other nagging number I’ve seen in Google’s core search business is a rise in traffic acquisition costs. Traffic acquisition cost is the part of its revenue that Google pays to its partners. This item grew to $3.08 billion in the fourth quarter from $2.45 billion in the fourth quarter of 2011. As a percentage of advertising revenue, traffic acquisition cost edged upwards to 25% in the fourth quarter from 24% in the fourth quarter of 2011.

Google’s Motorola problem can’t be called nagging: It’s too big. Wall Street is still looking for evidence that Google’s acquisition of the cell-phone maker will make significant money. (Google sold Motorola’s set-top box division during the quarter.)  Motorola Mobile had revenue of $1.5 billion in the quarter and Google reported an operating loss of the unit of $353 million by GAAP (generally accepted accounting principles) standards or a non-GAAP operating loss of $152 million or 10% of revenue at Motorola Mobile.

I’d call Google fairly priced at today’s close of $702.87 after these results. Shares of Google are up 8.6% from the November 11 low, and do remember that the fourth quarter is the strongest advertising quarter of the year.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Google as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

 

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