Where Google Inc (GOOG) Stock Is Headed?

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July 18, 2014 11:29am NASDAQ:QQQ

googleTara Clarke: Google Inc. (NASDAQ:GOOGL) reported second quarter 2014 earnings after the bell on Thursday – and the reaction of Google stock reflected happy investors.

The search engine king missed Wall Street estimates for earnings per share (EPS) by $0.15, with adjusted EPS coming in at $6.08 per share for a 27% gain compared to the same quarter a year ago.

But it beat revenue estimates, coming in at $15.96 billion (Wall Street had it at $12.32 billion), good for a 21.7% gain compared to Q2 2013.

One surprise: Google announced its chief business officer will leave his position.

“Nikesh Arora, our chief business officer, will be leaving Google after almost ten years at the company to join one of our partners, SoftBank, as Vice Chairman of SoftBank Corp. and CEO of SoftBank Internet and Media. Omid Kordestani, who was our business founder and led our sales teams for many years, will be stepping in to lead our business organization for now.”

The company appeared happy with today’s revenue beat and outlook.

“Google had a great quarter with revenue up 22% year on year, at $16.0 billion,” Chief Financial Officer Patrick Pichette said in a press release. “We are moving forward with great product momentum and are excited to continue providing amazing user experiences, with a view to the long term.”

Google Class A stock (GOOGL) shot up 2.3% in after-hours trading following the results.

Earlier this year, GOOG stock (which split in April) dropped when the company racked up expenses related to its Jan. 14 purchase of Nest Labs. The $3.2 billion purchase bought Google the leader in the “smart home” revolution, known for developing Internet-connected, or “smart,” thermostats and smoke and carbon dioxide detectors.

Despite the dip, Google stock has rallied nearly 9% since May.

Today, our expert watched four key components in Google’s earnings. Here’s what they are – and what he thinks is in store for Google stock in coming months…

Today’s Four Big Numbers and Where Google Stock Is Going

Money Morning Chief Investment Strategist Keith Fitz-Gerald keyed in on four big numbers: ad pricing, revenue, earnings, and profit margins.

Of these four, the biggie is ad pricing, because it affects the other three.

“Wall Street expects positive growth and I’m in line with that,” Fitz-Gerald said. “My questions have to do with how the company is handling the lowering of ad costs even as it expands growth, particularly in the mobile market and in e-commerce.”

You see, as Google grows on mobile, it hasn’t been able to cash in with its lower-cost mobile ads.

Consider Q1 2014, when Google’s clicks-per-ad (“paid clicks”) increased 26% year over year, but cost per click (CPC) decreased by 9% in the same period.

Wedbush Securities analyst Shyam Patil agreed with Fitz-Gerald’s concern over ad costs and mobile.

“People are going to be very focused on CPCs [the amount an advertiser pays Google per user click] because it’s an indication on how they are monetizing mobile,” Patil said to CNBC. “Monetizing that well is important in moving Google forward. On an aggregate basis CPCs have been declining for the past several quarters. That’s not reversing anytime soon. We are modeling negative 9% this quarter and basically for the rest of the year.”

Today, Google reported on advertising more in-depth than it ever has before, with these results…

In the past, it’s only revealed clicks-per-ad, average cost per click, and the change from the previous quarter.

But due to SEC pressure, Google reported the Q2 numbers not just from its own sites (google.com, youtube.com, etc.), but also from its network of sites like aol.com and ask.com. And it will present them separately, so investors can see which sites are and are not bringing in cash.

Paid clicks today were up 25% from a year earlier, while cost per click declined 6% – so cost per click seems to be stabilizing compared to Q1. But the difference today is that now we can see the breakdown across sites. For Google sites, paid clicks were up 33%, and cost per click was down 7%. For network sites, paid clicks were up 9%, and cost per click was down 13%.

In terms of revenue, Google grew 19% year over year in Q1 2014, and even more today. Most of its revenue came from ads, but hardware sales and digital content sales (from the Google Play store) have also recently been big contributors. According to app research firm Distimo, Google Play grew by 143% year over year in May, which would translate into $1.12 billion in gross sales for part of this second quarter.

The specific numbers from Google Play were not included in the press release today, but capital expenditures were. In Q2, spending on real estate, data centers, and other expenditures were up to $2.65 billion, compared to $2.35 billion in Q1.

Even though Google is fielding concerns with its paid-click advertising, for investors, these problems are more trivial frustrations than the damaging issues many other companies face.

Marketwatch reported that in a recent note to clients, FBR Capital analyst William Bird said Google has “one of the widest moats in media and a good deal of optionality around extending its competitive advantage into display advertising, digital content, travel, and payments.”

“Google offers very attractive exposure to each of the key structural growth areas of the Internet-namely, search, online video, mobile, and the app economy,” Bird wrote.

Fitz-Gerald agreed.

“Given Google’s widespread initiatives in things like fiber and wearable tech, I believe Google is really a bunch of companies. Ultimately the value is going to get unlocked down the line in a series of spinoffs – or even an antitrust suit,” Fitz-Gerald predicted. “Google stock is a long-term buy for sure if investors have the stomach and the wallet for it.”

Money MorningWritten By Tara Clarke From Money Morning

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