Digging Through Google’s Earnings

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Internet juggernaut Google (NASDAQ: GOOG) reported earnings last week. On the whole, the numbers looked pretty good, kicking off fiscal 2013 with a healthy EPS beat. With the revered status Google has attained, its reports are of course closely watched by analysts and retail investors alike. Let’s see what the release can tell us about where the search giant's headed.

Advertising Revenue

As Google is reliant on advertising for most of its revenue, this seems like a sensible place to start. Google-owned sites account for some 67% of total Google revenue, bringing in $8.64 billion for an impressive 18% increase year-on-year. Google partner sites are good for about a quarter of the company’s revenue, and their contribution increased 12% year over year to reach $3.26 billion.

Analysts tend to look closely at several items in Google’s reports, including Traffic Acquisition Costs (TAC) and average cost-per-click. TAC is the portion of revenue Google shares with its partners. For the quarter, this was up a hefty 18%. However, the proportion of TAC in total revenue stayed at 25%, the same figure as in Q1 2012.

The average cost-per-click, or the amount Google receives from advertisers every time someone clicks on their links, decreased 4% year over year and the same figure sequentially, which will disappoint some investors. However, the number of clicks increased 20% compared to the same period a year ago, and about 3% sequentially.

All in all, Google seems to be doing a pretty good job growing the top line, and according to some analysts, it appears to be improving its mobile advertising business as well.

Corporate Strategy and Competition

During the earnings call, CEO Larry Page remarked on some of the ways in which the company is looking to sustain growth. Google’s focus generally lies on its "big bets": YouTube, Android, and Chrome. However, Page underscored the need to continue developing these product lines, as well as coming up with new innovations, in order to keep up with the growing competition. According to Page, the company is not content to rest on its laurels, but is actively looking toward the future.

One of the competitors that has been trying to chip away at Google’s market share is Facebook (NASDAQ: FB), the social networking website which has by now become a household name. Also reliant on advertising for the bulk of its income, Facebook has been delivering impressive top-line growth since becoming a publicly traded company. The recent launch of its Facebook Home mobile interface underscores the company’s ambitions of taking on Google in the mobile arena, with Facebook's app nestling itself atop Google’s very own operating system.

Since entering the mobile phone arena, Google has of course had to deal with Apple (NASDAQ: AAPL), another tech giant. These two heavyweights have been battling it out for dominance of the mobile operating system market for some years now, and it seems as if the balance has tilted in Google’s favor.

In February 2013, Android took the lead with a 51% market share versus Apple’s 43%. Apple has been facing declining demand as cheaper Android phones from Asian manufacturers have increasingly penetrated the market. As a result, Apple's stock has taken a relentless beating since reaching highs of around $700 last year.

Valuations and Metrics

Google stock isn’t as cheap as I’d like to see it, up nearly 35% in the last 12 months, but at the moment, it does not appear severely overvalued. Trading at around 25 times trailing earnings, the stock is a little pricey, but nowhere near Facebook’s laughable 1,700 times earnings. The forward P/E is a lot more reasonable at 14.9.

The company has an excellent operating margin of around 27% although its TTM return on equity has dipped a bit to 16.6% from 19.65% in March last year. The company has about $7.2 billion in debt and ended the quarter with just over $50 billion in cash. Of course, Apple has around triple that amount, but seems to be having some trouble putting its enviable cash pile to good use.

The Bottom Line

Google delivered another upbeat quarterly report, showing that it can still sustain relatively high revenue growth. While average cost-per-click was a bit of a concern, it didn’t prove to be too much of a drag on growth, and the company is furthermore starting to see some results from its mobile advertising efforts. With a focus on future growth without ignoring its flagship products, Google looks well-positioned to continue its great performance.

Daniel James has no position in any stocks mentioned. The Motley Fool recommends Apple, Facebook, and Google. The Motley Fool owns shares of Apple, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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