Google Still Hating Itself and It Might Miss Estimates

Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Google (NASDAQ: GOOG) often reminds me of that beautiful supermodel who is without question very dashing in the public eye, but then goes home every night, cries in the mirror, hating herself. The company seems to always forget how great it is in the search business.

Instead, Google spends too much time trying to please the Street by wanting to be everything to everyone. In the long term, this strategy can’t work. Then again, the company deserves much credit that some of its ambitions, as scattered as they might have appeared, have been fruitful.

Beautiful on the outside, hurting on the inside

For instance, who would have thought that Google's mobile operating system, Android, would have grown to such popularity? Not only has it overtaken both Research In Motion and Microsoft in the smartphone race, but Android ended 2012 powering over 450 million phones, which is more than the total number of PCs sold. 

However, like the diva that it is, Google is never satisfied. The company endeavored to overtake Microsoft’s dominant Internet Explorer with its Google Chrome browser. To the company’s credit, Chrome has gained plenty of traction. This is on top of having released Chromebook, the company’s first in-house built laptop. And this is while launching Google+, the company’s social media platform that rivals Facebook.

Clearly, the company’s goals are plentiful, which is good. But they’re also scattered. In business, it’s called lacking focus. As great as Google is, there’s an obvious identity crisis. Then again, it’s hard to chastise any company that is able to grow revenues at a rate of 45% to $14.1 billion as Google did in its third quarter.

However, as great as all of these accomplishments may be, Google still looks on the other side of the fence, sees Apple and then walks back inside its house feeling inadequate. This is despite having quite a bit of ammo at its disposal to attack any market it wants. But there's also been some misfires.

Will there be a surprise miss In Q4?

At this point, Google’s execution has not been impacted by these moves. However, the company’s fourth-quarter earnings on Tuesday should be interesting. For instance, Google’s $12.5 billion acquisition last year of Motorola Mobility was heavily criticized – and for good reason.

Although Motorola’s patents were valuable, Google was desperate to improve its competitive position against Apple in the smartphone and tablet race - except it's never worked that way. And this was glaring in Q3 as it missed EPS estimates by 15%. Not only did $9.03 earnings per share fall short, but it represented a 7% decline -- the reason, its Motorola acquisition.

The company that Google decided was worth a 60% premium posted Q3 revenue of only $2.6 billion – arriving 11% below consensus estimates of $2.94 billion. This took a meaningful toll on Google's operating income, which, although it grew by 9% to $4 billion, grew slower 15% year-over-year.

Clearly Motorola was a mistake and the acquisition has weighed on Google’s performance – although the company would never make this admission. But another abysmal Motorola performance will rattle the Street about Google’s future. But there’s good news. Motorola is now off the books – at least, the home portion of its business.

Last month, Google auctioned off Motorola’s home business with the winning bid of $2.35 billion going to Arris (NASDAQ: ARRS), a cable-equipment maker. Of the $2.35 billion, $2.05 billion will be paid by Arris in cash, with the balance of $300 million to be paid in newly issued shares – giving Google a 15.7% stake in the company.

How will Google account for this?

This is going to be the tricky part and according to current Q4 estimates, analysts are overlooking the potential impact of this transaction. According to Brent Callinicos, Google’s treasurer and chief accountant, the sale of Motorola to Arris will be reported in Q4 as “discontinued operations.”

However, this is not a Street consensus. And Callinicos seems concerned that this is being overlooked by analysts. In his recent post, he provided 3 key points. He says:

  • “For example, as of this writing, a majority of Wall Street analysts who cover Google have not reflected the Home business as discontinued operations in their estimates.”
  • “Results from discontinued operations are required to be presented separately from the results of continuing operations, below net income from continuing operations.”
  • “As the sale of the Home business meets the above U.S. GAAP criterion, we are required to present the Home results as discontinued operations in our consolidated statements of income.”

In other words, keep an eye on what happens to the shares when the numbers first cross the tape on Tuesday. Average Street estimates calls for EPS of $10.54 on revenues of $12.3 billion. Although this was not stated explicitly, Callinicos is nonetheless advising that both Google’s EPS and revenue will arrive lower than expected.

Although the reason is clear, it is unknown how the Street will respond. That's assuming that they've figured it out. But not many of them have. Some have already taken notice however, including Doug Anmuth, analyst at JPMorgan, who lowered his Q4 estimates accordingly to EPS of $10.19 and $11.4 billion in revenue. Essentially, investors should expect revenue to come in $1 billion lower with EPS dropping by roughly 40 to 45 cents.

Bottom Line

It’s not often that companies throw out little hints like this before it drops a bombshell. Then again, “bombshells” are the unexpected. Clearly there are reasons not to overreact. Google is operating on all cylinders. That being said, I still want to see the company overcome its fixation on wanting to be “everything to everyone.”

In the meantime, the stock remains one of the best buys on the market. And if the Street misinterprets the numbers, thank your lucky stars as Christmas might have been extended to January.

rsaintvilus is long Apple and has no positions in the other stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of 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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