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Google (GOOG) Disappoints the Street with a Surprise Miss

By: , dated January 23rd, 2012

Last Thursday, search giant Google (GOOG: Charts, News) posted fourth quarter earnings that failed to impress Wall Street. As a result, shares slid in after hours trading and continued to lag the market on Friday. Google reported adjusted fourth quarter earnings of $9.50 per share on revenue of $10.58 billion – enviable numbers for any company – but missed the analyst consensus of $10.51 per share while beating on revenue expectations of $8.4 billion. Without special adjustments for one-time charges, Google actually earned $8.22 per share, a 6% increase from the prior year’s fourth quarter, while revenue increased 25%. While on the surface Google beat the analysts’ revenue expectations of $8.4 billion by a healthy margin, the company didn’t include ad commissions, which brought revenue down to $8.1 billion, missing estimates.

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The company’s failure to meet estimates was attributed to an 8% year-on-year decrease in prices charged for each click, and marks the first time Google’s core business – search and ad revenue – has alarmingly eroded. On average, the company had posted year-over-year increases in price per ad click between 5% and 12% for the first three quarters of the year. Total costs also increased 30%, further hurting its earnings. Lastly, over half of the company’s revenue still comes from the United States and Europe, which have been essentially flat over the past quarter. A weakened euro also further dampened earnings from the crisis-stricken region.

Chief business officer Nikesh Arora attempted to assuage investors, stating that European performance was “actually quite healthy”, and that the company was in the process of making a “secular shift” in online advertising. CEO Larry Page tried to emphasize the strength of Google’s other assets. “I am super excited about the growth of Android, Gmail, and Google+, which now has 90 users globally – well over double what I announced just three months ago,” Page stated. “By building a meaningful relationship with our users through Google+ we will create amazing experiences across our services. I’m very excited about what we can do in 2012 – there are tremendous opportunities to help users and grow our business.” Each of these assets, however, are difficult to monetize. Although Android is now the leading smartphone platform in the world, the operating system is free, and Google only earns revenue from search and advertising funneled from the mobile devices. Gmail has far less ads than its counterparts, such as Yahoo (YHOO: Charts, News) Mail or Microsoft’s (MSFT: Charts, News) Hotmail. Although Page’s baby, Google+, has had a good running start, the number of active users is questionable, and its 90 million total users (active and inactive) still pale in comparison to Facebook’s 800 million.

Google’s surprising $12.5 billion takeover of Motorola has also raised red flags with investors, with many believing that the ailing handset maker would be a dead weight on the company’s margins and bottom line. The European Commission has yet to decide on allowing the takeover to complete, with a result due next month. Analysts are also concerned about the company’s hiring spree, the biggest one in Google’s 13-year history. Google hired 8,000 people over the past year, adding 1,000 new employees in the fourth quarter alone. The company now employs a workforce of 32,500. Bears believe that Google’s lack of focus, fragmentation of business segments, clashes with local and national governments, and blind devotion to attacking Facebook and Apple (AAPL: Charts, News) will result in declining margins and earnings in 2012. Bulls, however, point to the company’s record revenue, brand recognition and undeniable, chaotic growth potential. Shares of Google currently trade at 14.57 times forward earnings with a 5-year PEG ratio of 0.97, extremely attractive valuations for the dominant search engine on the Internet.

Other News About GOOG
Google’s Results Disappoint, Sending Shares Down
Shares get punished for Page’s first earnings miss.
The opposite of evil: Google named best place to work in America
Google’s workplace is still the model for employer innovation.
Other Stocks in the News
Microsoft Escapes Earnings Hangman
Microsoft beats the Street but margin concerns weigh.
Intel Q4 earnings rise 6%, beat estimates
Intel reports higher than expected earnings on stronger PC sales.

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Leo Sun Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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