Admiring Google's Results After Search for Respect

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

Shares of Google (NASDAQ: GOOG) fell almost 10% after the search giant posted disappointing third quarter results, during which the company missed EPS estimates by 15%. So without question investors were biting their nails in anticipation of a Q4 turnaround.

Complicating matters were the problems surrounding Motorola Mobility, which impacted Google’s bottom line as costs continued to rise while revenues eroded. Then, there was the notion that Facebook was encroaching on Google’s advertising dominance. Suffice it to say, Google had a lot to prove. And by and large, its Q4 results answered the call.

Revenue Soars, But Ads Still Under Attack

Google beat Street estimates for the quarter with profits jumping 6.6% year-over-year to $2.89 billion, or $8.62 per share. The tech giant also rewarded investors with consolidated revenues rising 36% year-over-year to $14.42 billion – beating analysts’ estimates of $12.34 billion. 

Remarkably, revenue surged despite a drop in average cost per click, which tracks how much money advertisers pay Google for ads. As noted, this was an area of concern for analysts as reports surfaced several weeks ago that Facebook (NASDAQ: FB) had gained meaningful traction with advertisers, particularly with mobile.

At one point last year, a report was released by Wordstream that measured the “click through rate” (or CTR) between the Google and Facebook. The report revealed that Facebook had less reach than Google and therefore its ads were less effective since advertisers were paying more per click on Facebook than they were on Google.

However, in the most recent study, it showed a reversal as Facebook’s CTR had increased, which meant that advertisers were now paying a lower rate per click. What’s more, that Facebook posted a 32% year-over-year growth in ad revenue proves that its move toward sponsored stories has also been effective – helping the company gain more overall footing with advertisers.

As noted, despite the impressive rise in revenue, Google’s cost-per-click fell 6% year-over-year. Although it gained 2% sequentially, this was the fifth consecutive quarterly drop. Clearly Facebook is making inroads. But the Street said so what! On the report, the stock, which has been under pressure of late, jumped 4% after hours. Google CEO Larry Page said in a statement:

“We ended 2012 with a strong quarter. In today’s multi-screen world we face tremendous opportunities as a technology company focused on user benefit. It’s an incredibly exciting time to be at Google.”

Expenses Rise, But a Necessary Evil

One of the constant bear arguments about Google has been the steady rise in expenses. It was no different this quarter as operating expenses climbed 42.3% to $4.81 billion – representing 33% of Q4 revenue. When compared to Q4 2011 there was a 1% increase – albeit a modest one, but not the trend analysts prefer. However, it’s necessary.

As evident by Google’s push into smartphones, tablets and most recently, ISP projects, the company has ambitions beyond search – despite its dominance in that market. And to remain a tech power, it’s going to cost money. Plus, since the company’s main source of revenue comes from ads, Google’s position in the mobile market against Apple (NASDAQ: AAPL) is crucial as smartphones become more dominant.

For that matter, Google’s expenses -- or “investments,” as they may be referred -- have worked. For instance, I was on record in saying Apple would beat its iPhone sales estimates of 50 million units since it was reported that Apple had overtaken Google in U.S. smartphone sales – reaching 53.3% market share. I was wrong.

Apple sold (only) 47.8 million, which proves that Android and Samsung are indeed closing the gap while applying pressure on Apple’s margins. So essentially, if Google’s expenses only served to puncture a hole in “Apple’s sales,” without question it was effective. Likewise, Google has also been fighting off threats from Research in Motion (NASDAQ: BBRY).

While RIM was once presumed dead, this is no longer the case. It's enjoyed an enormous run in its share price, all based on the anticipated release of BB10. While RIM has been considered a threat to Apple, a case can be made that RIM can be a threat to any phone hardware/software combination – including Android.

I made this point recently about Apple and it also applies here. It’s no secret that Amazon (NASDAQ: AMZN) plans to launch a phone this year. And reports suggest that the phone may be released as early as the second or third quarter. Imagine what would happen if Amazon chooses RIM’s BB10 for its operating system.

It seems far-fetched since Amazon’s Kindle Fire already runs on Android. But there’s a clear strategy at play here as it could impact the growth of both IOS and Android. Essentially, Amazon would be taking out two phone competitors with one decision.

While iOS and Android are the clear dominant operating systems, an Amazon/RIM partnership will help bring more balance to market while giving Amazon time to catch up. This now becomes more intriguing as Google would suddenly have more competitors with which to contend in hardware.

This is while the company is trying to fight off Facebook in mobile ads. Google’s only defense will be to spend - it’s unavoidable. As disconcerting as it may be for analysts to track Google’s expenses, it’s necessary – at least for now. And with roughly $50 billion in cash, it’s not as if Google is not delivering on the bottom line.

Bottom Line

I’ve been critical of Google and recently called its ambitions “scattered.” While I’m not ready to back away from this statement, I’m nonetheless impressed by its rate of aggregate growth. The company’s execution has been solid. Plus, with the Motorola situation now being resolved, Google’s future remains as bright as ever. With shares trading at $741, the stock is a sure bet to hit $800 to $830 by the second half of this year. 

rsaintvilus is long Apple and has no position in any other stocks mentioned. The Motley Fool recommends, Apple, Facebook, and Google. The Motley Fool owns shares of, Apple, 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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