Google Earnings: Wall Street Isn’t Impressed, But Who Cares?

Source: Thinkstock

Source: Thinkstock

Class-C shares of Google (NASDAQ:GOOG)(NASDAQ:GOOGL) closed Wednesday up 3.75 percent at $556.54, yet shares fell 2 percent in pre-market trading Thursday after the technology and Internet titan posted first-quarter earnings that didn’t pass muster with Wall Street. GAAP revenues of $15.4 billion, up 19 percent on the year, missed the mean analyst estimate of $15.52 billion — adjusted earnings of $6.27 per share, up 4.5 percent on the year, missed the mean analyst estimate of $6.40 per share.

What contributed to the mismatch between expectation and reality was a decline in ad prices that was apparently unanticipated by analysts. Google’s cost-per-click, a metric that measures how much ads cost, were flat sequentially and down 9 percent on the year. Aggregate paid clicks, the actual number of clicks made on Google ads that the company gets paid for, declined 1 percent sequentially but were up 26 percent on the year.

The news is a bit underwhelming for Google bulls who have pushed the stock to a trailing price-to-earnings ratio of 29.28. Although the company is still clearly growing rapidly — 19 percent year-over-year revenue growth is nothing to scoff at — there are evolving concerns about Google’s core ad business. GAAP operating income of $4.12 billion in the first quarter was up about 9.9 percent on the year, but fell to 27 percent of revenues from 29 percent (adjusted operating income was $4.95 billion, up 12.5 percent on the year at 32 percent of revenues, down from 34 percent).

But this apparent deceleration comes packed with a couple caveats, not the least of which are issues related to the sale of Motorola to Lenovo. Google entered into an agreement to sell the hardware unit in January, and recorded $116 million in amortization expenses related to Motorola intangibles.

It’s been kind of a crazy ride for Google investors recently. The company has been coping with mixed reactions to a stock split that took place on April 3. The split created a new class of non-voting Class C shares, which are intended to subsume the well-known GOOG ticker and become the company’s primary equity trading vehicle. The shares existing before the split will trade under the ticker GOOGL and retain their voting power.

The split is designed to fortify the control that Google’s top executive team has over the company, a power-structure that Google has championed since its inception. The structure, CEO Larry Page argued when the company first took to the public markets, is designed to afford top executives strategic control of the company — something that ostensibly allows Google to maintain purity of vision, and makes it resistant to the financial whims of shareholders, as well as analyst speculation and the ebb and flow of the market. A bet on Google is, and always has been, a bet on the innovative capacity and business savvy of the company’s top executives.

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