Revenue Increases Masking Growth Rate in Earnings
Edgar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The technology sector continues to lift stocks with technology. The SPDR ETF XLK is showing bullish momentum since last week. Sandisk (NASDAQ: SNDK) missed earnings results but shot up 3% with the aid of UBS's "buy confirmation" anyway, Qualcomm (NASDAQ: QCOM) is not able to keep up with increased demand in its smart phone products, and Microsoft (NASDAQ: MSFT) posted its first recorded $6 billion loss due to a write down of its online advertising business. The news is not all that great considering companies' attempts to diverge investors' attention from net earnings to their revenue increases by boasting about their future quarter expectations, not so much on their current financial stance.
MS Office is Now Installed in Over 1 Billion PCs
Despite its $0.67 EPS falling short 2.9% from the same quarter last year, Miscrosoft is expecting a rosier 2013 as it plans to unveil its Windows 8 and Surface tablet in an attempt to penetrate Apple's market share. Investors looked beyond its $6.19B Aquantive write down with what is coming in the consecutive quarters - Windows Server 2012. As a stern critic, I gain satisfaction from factual data than mere words of optimism by Mr. Ballmer:
...Over the coming year, we'll release the next versions of Windows, Office, Windows Server, Windows Phone, and many other products and services that will drive our business forward and provide unprecedented opportunity to our customers and partners.
I was impressed by Microsoft's Business Division revenue that grew 7% for the 4th quarter reflecting an ongoing momentum in its Office 2010 sales, but was disappointed to see company's 13% drop in its Windows Live segment. Its entertainment and devices division also grew 20% reflecting Skype's popularity and the Xbox, which remains to be the best selling gaming console for 18 consecutive months. I'm a bull on MSFT and expect it to trade above $30 by next month, granted if we don't see overall market indices sink due to European woes.
Google is Still Undervalued
Google (NASDAQ: GOOG) investors had grown impatient with its lack of performance prior to earnings results, as the stock struggled to break its 2012 resistance of 650. With my weighted average cost of capital of 12.3%, perpetuity growth rate of 3%, and a free cash flow of 17%, the stock should trade for no less than $800. It begs to ask the question as to why investors don't want to pay a premium for Google as it strives to raise the bar for its rivals?
Being plagued from the softness in European advertising dollars and the Motorolla Mobility merger, Google has increased its debt load adding nearly 20,300 employees this year with a current grand total of 54,604 full time workers compared to the 33,000 of last year. Insiders have also been selling the stock at really low prices, which is also another cause for concern. Executive Eric E. Schmidt dumped 19,400 shares at the end of June at a price of $585.98. John Hennessy, a director, also sold a considerable amount.
Motorola Mobility Purchase - Double Edged Sword
In August of 2011, Google announced its acquisition for Motorola for $12.5 billion in cash. $843M of its $1.25B revenue recognition came from its mobile business segment. MMI's primary intent was to fortify its patent portfolio and protect its key Android franchise. However, the public is skeptical whether the MMI purchase will protect Android from IP related attacks and whether it will in fact weaken Google's long term growth by hurting its margins.
New Developments and Features
Thumbing its nose at Facebook (NASDAQ: FB), Google has unleashed several cool features including the Google Video group chat and "Find My Face" recognition feature that makes tagging people in photo albums much easier. This came shortly after Google recognized the value in PittPatt, a small company that specialized in developing the code, which allowed the recognition of faces in a user's circle. Google Group chat allows a maximum of 10 users to gather and watch youtube videos together, engage in a discussion by voice chat or just spectate without any software installations.
Lack of Revenue Diversification
One reason I believe investors are not gung-ho about Google is its lack of revenue diversification. Despite earning $9.7 billion last year, ten times more than Facebook, it falls behind in the aforementioned and is very sensitive to Eurozone weakness. As the company turns up the heat on its rival Facebook, its #1 risk revolves around its revenue stream diversification. Google's online advertising revenue is roughly 98% of its total income as of last quarter, compare this to Facebook's 85% revenue from online ads and 12% from Zynga's partnership. Income stream diversification should be of the utmost importance if Google wants to stay in the lead as a tech giant.
edgarambart30 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Facebook, Google, Microsoft, and Qualcomm. Motley Fool newsletter services recommend Apple, Google, and Microsoft. 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.If you have questions about this post or the Fool’s blog network, click here for information.
