- Google revenue growth has slowed as more people turn to inbound marketing efforts over CPC.
- Advertising revenues have stabilised and average Cost per Click has dropped.
- Other revenues look promising but are too small to make a difference anytime soon.
- Margins have decreased dramatically with net margin down to 18%.
Google (NASDAQ:GOOG) have just reported earnings for the 3 months ending 2014-09-30, and the results don't make for the best reading if you're a shareholder. While the company seems to be able to grow it's global footprint through revenue, average cost per click and overall EPS were down for the quarter, making it likely that the business will either flat line for the year or only show low single digit growth in earnings.
This is a first for the business that has enjoyed rapid growth at both the top and bottom lines consistently since its inception. While this could be a blip, there are worrying signs that the business is perhaps not performing at its peak.
TAC and Cost-Per-Click
While revenues have grown, the worrying signs are the decreasing Cost-Per-Click and the increasing TAC (traffic acquisition costs). The interesting thing behind these numbers is it means there is less competition on the Google Network for the first time and that partner click growth outpaced Google's own sites.
Other Cost of Revenues, Operating Expenses and SBC
Google is at war, and this means everyone working there is a target. When you're on top, you need to expect this to happen and the search giant is well aware of the threat from Microsoft, Facebook and Apple. World War II taught us that fighting a war on three fronts is not a great idea, but Google is dealing with it quite well by not hunkering down. Instead, it's growing staff numbers at an incredible rate, incentivising staff massively internally and increasing its estate (both digital and real-world) to ensure it's well placed to grow in the future. The problem with this is two-fold. First, it's really expensive. Second, it's hard to see where the growth is going to come from.
Mobile, mobile, mobile
Everyone is excited about mobile - and they should be. This massive growth area provides revenue growth opportunity for just about everyone. The question is, does this count for Google though? Interestingly, it appears it does - particularly when it comes to in-shop comparisons, travel and finance purchases.
While this is great news, it doesn't change the mix enough to fuel massive growth. The problem I have with Google today is I just can't see the major growth mechanics that will allow it to rev up the engine and justify the massive 27x P/E ratio and even higher FCF ratio.
The company gets a great bill of health when looking at Strength and Earnings Predictability. Intrinsic Value is fair and they don't pay a dividend, however, the Returns score is what is really concerning. When you compare it to other players in the tech / online space, it really doesn't stand up to its competition - and that is quite worrying. Timing is great at the moment as the score is dipping quite heavily.
1.31% growth forecast
Our engine has pegged growth at 1.31%, trailing behind inflation, so no growth at all. This is based on the first half of the year and seems to be spot on in terms of where they will close the year out.
As you can see, we haven't had any purchase opportunities and have never held the business, but if you've got it, it is still a hold. This is purely down to the current weakness, however, it is well above our consider sell and it hasn't been there since before the great recession. If you're in it, it's probably wise to trim it and take some profits now.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.