Google: Weak Q1, Still Attractive!

  • Google missed revenue and EPS estimates in Q1 2014.
  • Performance remained healthy in absolute terms though weak sequentially.
  • Google’s stock may be volatile in the short term but it is attractive for long term investment.

Google Weak Q1 Still Attractive

Google (NASDAQ:GOOG) reported its earnings for the first quarter of 2014, missing estimates both in terms of revenue growth as well as adjusted EPS. The company’s stock fell over 3% in after-hours trading as Google’s latest financials were weaker than expected, despite the boost from axing its ailing Motorola segment.

Estimates vs Actuals

Revenue estimates - $15.5 billion. Adjusted EPS estimates - $6.4 per share.

In Q1 2014, Google registered a revenue of $15.42 billion, marking its first sequential decline in revenue since Q1 2010. Adjusted EPS came in at $6.27 vs estimates of $6.4 a share.

Key Financials & Metrics

Excluding Motorola from previous quarters, In Q1 2014, Google’s revenue grew 19% over Q1 2013 (Y/Y) and declined by 1.2% sequentially. Though Google fell short of analysts’ estimates, the shortfall would have been restricted to $30 million vs the current $80 million on a forex neutral basis. Therefore, at an operating level, the revenue miss is not as large as it appears.

Google Revenue and Operating ex Motorola

Excluding Motorola, Google reported an operating profit margin of 27% marking a decline of about 2% Y/Y, and a sequential increase of about 3% along expected lines. However, the company claimed to have encountered legal and M&A expenses, thus dragging the operating margin.

Further, Google’s headcount still includes employees of Motorola, and so, operating expenses are still not completely ex-Motorola. Net profit margins (including Motorola) declined to about 22% from nearly 24% a year ago though it expanded by over 2% sequentially.

Cost-per-click (revenue for Google per ad clicked) declined by 9% in line with last year’s trend while paid clicks (number of ads clicked) grew at 26% Y/Y, down 1% over sequentially since Q4 2013.

The positive was that revenue from ads on Google owned sites continued to grow much faster at 22% vs revenue from its ad-network which grew at 4%. This also translated to a decline in Traffic Acquisition Costs (TAC). Contrary to expectations, at 23% of ad-revenue, TAC declined marginally, recording a decline of 1% sequentially and 2% Y/Y. TAC is paid to sources which divert search traffic to Google.

Further, growth in Google’s ‘other revenue’ from hardware, app sales/distribution, etc. slowed to 48% Y/Y from 150% in Q1 2013 to clock $1.55 billion this quarter.

To sum up, in absolute terms, Google’s performance wasn’t bad at all. On most counts, its sequential performance remained moderate to marginally negative, with not much to fret about.

Other highlights from Google’s Q1 2014

The company continued to see success in its ‘enhanced campaigns’ and ‘total conversion’ tools as customer feedback remained positive. Google announced that Google Wallet will power order payments on Domino’s Pizza’s Android app.

There was some encouraging news from YouTube, as nearly all Super Bowl advertisers also turned to YouTube, resulting in over 300 million views for Super Bowl related ads. Google has also announced an outcome of sorts from Neilson evaluation of YouTube’s ad performance. At its upcoming ‘Brandcast Upfront’ event, the company will table its new offering, featuring access to the most popular content on YouTube, with endorsements from Neilson.

Google’s display ad segment will also gain traction as it is scheduled to share an exclusive high profile fashion event with over 7 million viewers across its display network. Further, its ad-exchange (online ad-space buying platform) also saw continued momentum with bulk publisher sign ups offering ad-inventory for potential advertisers.

In a move that could boost its Android eco-system, Google introduced Google Play movies in 39 countries, taking the tally to 65 countries. It also developed Google Play music and games with features like game gifting and multiplayer support evoking a strong response users (75 million new users in 6 months). In March, it also launched wearable devices project, Android wear.

Google Valuation

Google currently trades at a Price/Earnings multiple of 29.2 and a Price/Sales multiple of 6.2. As we had mentioned in our Q1 Preview, we think Google is attractive investment at these valuations, for long term investors.

Though Q1 turned out to be a luke-warm quarter, this could be a result of the shift of focus to mobile advertising since mobile platform typically has lower monetization rates but at higher volumes. Further, we do see some of the outcomes like the developments around YouTube, as potentially big positives for Google.

Given the not so great Q1 numbers, in the short term, the stock price may be volatile. However, we don’t see any reason to be overly worried about the company’s future prospects, and any major corrections could serve as long term investment opportunities.

To read our take on Google's stock split, click here.

Read our latest articles on YandexBaidu and a comparison of the 3 search engines

To see Google’s latest stock price movement, click here (NASDAQ:GOOG)

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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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