Google's Earnings Disappoint in the Short Run as the Company Ramps Investment for the Long-Term

10/17/2014 5:32 pm EST


Jim Jubak

Founder and Editor,

Some Wall Street analysts were disappointed that this search engine missed analyst consensus estimates for revenue and earnings per share, but MoneyShow's Jim Jubak sees it as a sign that the company—like the Internet—still has years of growth ahead of it.

So what are we investors to make of Google’s (GOOG) third quarter earnings report yesterday?

Wall Street is clearly split.

Google missed analyst consensus estimates for revenue and earnings per share ($6.35 reported versus $6.53 projected) leading one side of the debate to point to a slow down in growth in ad revenue from the company’s core search business. The number of paid clicks on ads grew only 17% in the quarter. That’s the slowest growth in three years and below the 25% growth in the second quarter of 2014. In this negative view, the surge in hiring and capital spending in the quarter was a sign that Google was engaged in an expensive effort to make up for its maturing search business.

The other side of the debate doesn’t deny the slowdown in the growth of the number of paid clicks but points out that the rate of decline in the price of a click is falling—down 2% year over year in the third quarter—versus a decline of 6% in the second quarter. That’s a sign, these analysts say, that the hit to revenue—inherent in the growth of mobile platforms, since mobile ads sell for less than ads on relatively big screen desktop PCs—is moderating. Tools that automatically resize desktop ad spots to fit on mobile devices and that show users of mobile devices if a product that they’ve searched for is available for purchase nearby look to be working to bolster mobile ad revenue.

These positive analysts also don’t deny that capital spending and hiring have grown—nor do they hide their anxiety at the increase—but they see these investments as ways that Google is leveraging its core business. The company is still clearly in investment mode—Google spent $4.2 billion in the first half of 2014 on acquisitions that included smart thermostat company Next Labs, DropCam, and Skybox Imaging, and the company added 3,000 employees in the quarter—but these analysts see evidence in Google’s progress on monetizing YouTube and Google Play, the expanded digital marketplace that rolled up Android Marketplace and Google Music, that the company is making progress toward harvesting profits from these investments not too far down the road. This isn’t (AMZN) where a grandiose goal of selling everything to everyone produces unfocused spending. Google is investing in businesses that leverage its core position at the center of the Internet.

Where do you come down?

The Wall Street analysts that quizzed Google about the results in yesterday’s conference call seemed to fall mostly in the “unhappy with Google’s spending camp.” If you’re looking to try to figure out what Google’s shares will sell for next quarter or two, I think this is a legitimate worry.

If, on the other hand, you’ve got a slightly longer time horizon—say the five years or longer of my long-term Jubak Picks 50 portfolio, then I think you cheer on Google’s relatively focused investment as a sign that this company—like the Internet—still has years of growth ahead of it. I’d be adding shares of long-term portfolios on current market weakness and impatience among Wall Street analysts.

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