Google Earnings Review Q3 2014

  • Google revenue and Non-GAAP EPS missed estimates in Q3 2014.
  • Google's revenue growth was strong and profitability was lower partly due to non-cash expenditures.
  • Google valuations indicate a huge upside potential.

Google (NASDAQ:GOOG) reported its Q3 2014 earnings on 16 October, post market hours. The company missed revenue estimates marginally. However, Google’s non-GAAP EPS missed estimates by a larger margin. While Google’s revenue growth remained robust, the decline in profit margins was largely on account of non-cash expenses like impairment of patents and stock based compensation. Google’s stock was down about 2% in after-market trading. On the whole, Google’s performance was decent with more positives than negatives. We remain bullish about the potential upside in Google valuations from its current price of $537 a share.

Google Revenue & EPS Q3 2014 – Estimates Vs Actuals

In Q3 2014, Google registered a revenue of $16.52 billion, missing the consensus estimate (average) by $70 million. Google’s EPS (Non-GAAP earnings per share) of $6.35 was 19 cents lower than estimates.

Consensus Estimates











Google Revenue Growth

Google’s revenue continued to grow at a healthy pace, clocking a 20.5% YoY growth in Q3 2014. Google’s core business growth of 17% YoY marked an improvement over the 15% growth in Q3 2013.

Ad-revenue from Google’s O&O (Own & Owned) sites grew at 20% YoY, and continued to expand their share of total ad-revenue. Google’s O&O sites continued to drive Google’s aggregate Paid Clicks. However, growth in paid clicks slowed compared to previous quarters. In the con-call, Google’s management attributed the slowdown to routine fluctuations and changes made to improve mobile click pricing that impacted “lower quality clicks”.

Ad-revenue from Google’s partner sites or ad-network accelerated for the fifth quarter on the trot, growing at 9% YoY. Paid Clicks growth was slower in Q3 compared to the growth of 9% in Q2 2014 and 5% in Q3 a year ago.

YoY Growth




Paid Clicks








The CPC (Cost Per Click) or click pricing has been falling consistently quarter after quarter, both on Google’s sites as well as on its network.

However, the good news for Google is that CPC decline rates have slowed significantly over the last 4 quarters on its O&O sites, where it generates over 76% of its revenue. This has held up Google’s aggregate CPC. In contrast, CPCs on network sites have been falling at a faster pace every quarter, for the last 4 quarters. CPCs on the network declined by 4% this quarter as opposed to a 13% fall a quarter ago. Google’s Traffic Acquisition Costs (TAC) came in at 22.8% of revenue.

Google’s other revenue grew by 50% to reach $1.84 billion. Growth in this segment drove the overall growth rate and could continue to do so, as Google recently launched a number of products including Nexus 6, Nexus 9 Tab and 5 new Chromebook devices.

To sum up, Google’s revenue growth was healthy, with positives emerging out of its non-core business and advertising on its O&O sites.

Google Profitability

Google registered operating and net income of $3.72 and $2.81 billion respectively, translating to operating and net profit margins of 22.5% and 17%. Google’s profit margins declined compared to the levels seen in the last several quarters. However, the company’s costs spiked largely on account of two non-cash expenditures:

  • $378 million - Impairment charge on patent licensing royalty asset acquired as part of Motorola Mobility
  • $375 million – Increase in stock based compensation (SBC) compared to the SBC in Q2 2014

The increase in stock based compensation was explained as part of the 2 year cycle of compensating top executives. A similar dip in profit margins can be seen in Q3 2012 as well.

Excluding these two costs, Google’s operating margin comes in at about 27%, higher than it has been in over 2 years, and its net margin, at 20.4% is marginally lower than it has been over the last twelve months. The computation is based on Google’s effective tax rate of 22% during Q3 2014.

Here again, it’s worth noting that Google’s headcount still includes about 3500 employees (6.3% of total headcount) from the Motorola business.

Based on these factors and given that the lower margins aren’t arising from competitive pressures, Google’s profit margins could return to more familiar levels in the coming quarters.

Google Valuations

We see Google’s Q3 2014 results to have more positives than negatives. Google’s profitability isn’t as bad as it seems to be. Further, Google has continued to deliver solid growth.

Google is currently trading at $535 a share. Google’s PE and Price to Sales ratio of 5.5 and 27.4 respectively indicate a strong upside potential. Based on its average PE and Price to Sales ratio over the last year, the stock has the potential to trade at approximately $595 a share.

Further, as we had mentioned in our Google valuation pre earnings, Google is growing at a fast enough pace to meet analyst estimates for FY 2014. To meet full year revenue estimates of $66.3 billion, Google’s revenue needs to grow at about 17% YoY (excluding Motorola) in Q4 2014. Given its track record, Google looks likely to achieve that growth rate. Based on its PE and PS averages over the last year, Google could be trading at about $640 by Jan 2015 (Q4 results announcement).

Our Google stock analysis assigns Google a buy rating at its current valuations.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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