Correction Time for the Tech King
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With the continuing decline in Google (NASDAQ: GOOG) shares during Friday’s session, the company finds its stock squarely in correction territory. After opening the session with a “dead cat bounce,” shares are now down over 12% from the recently set highs. Friday’s slip follows the precipitous decline caused by the company’s early and disappointing earnings announcement. While the dramatic nature of the correction leads one to wonder how Google could have let earnings details leak, nothing in the release suggests that the future is not looking bright. As such, the drop represents a great buying opportunity for anyone looking to establish a lasting position.
Taking a Breather
Much as shares of consumer electronic giant Apple (NASDAQ: AAPL) have been taking a much-needed break from their meteoric rise, the fall in Google shares should be seen as a necessary breather. If you consider the 6-month chart below, you can see that after trading steadily higher for months, each of these industry-leading stocks are experiencing mild declines. Apple’s shares broke first, but have handled the needed respite more smoothly; Google seems to be trying to get the job done in a few days. In both cases, however, investors should see the pause as both a buying opportunity and the rest that will allow these stocks to trade ever higher.
By the Numbers
For the third quarter, Google saw sales come in at $11.33 billion, below expectations of $11.86 billion. This translated to a year-over-year EPS slide of 7.1%, as earnings were reported at $9.03 relative to $9.72 for the same quarter last year; the consensus expectation for the company was $10.65. This is the first EPS decline for the company in the last four years.
A critical component of the miss was weaker than expected advertising revenues, which grew at only 17% - the first sub-20% figure in several years. The Motorola Mobility division was also a drag on earnings, as that division’s contribution to net income fall by 20% to $2.18 billion. On a more positive note, CEO Larry Page went on the record in the earnings call saying the revenue run rate from mobile has reached $8 billion per year.
A Bit of Perspective
There are two ways to interpret many of the Google numbers, and this choice of perspective will place the position of the company into context. For example, while Google has seen the cost-per-click (CPC) rate paid by advertisers drop over the last several quarters, ad revenue is still growing at a healthy pace; as stated above, growth in the quarter came in at 17%. You can choose to see this as a matter of concern, as the number is uncharacteristically below 20%, or you can realize that 17% is a very healthy level of growth, particularly as the company continues to push deeper into the largely untapped mobile market.
Similarly, the results for Motorola Mobility can be seen as some evidence that the acquisition of the cell phone maker is not playing out as hoped, or you can believe that Motorola just released the most recent line of Razr devices and that sales are going to be prone to some cyclicality based on product launches. In either case, the news has mixed significance at best.
Trading the Fall
Given Google’s reach into search, cloud computing, enterprise software, mobile devices, and burgeoning areas of technology, the company remains the true king of tech. Shares had been moving steadily higher and were in need of a correction, and an earnings release below expectations has proved to be the catalyst for that move. While the results are to be taken seriously, I believe this dip is a huge buying opportunity and should be capitalized upon.
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