Q3 earnings were reported after the close of market as earnings seasons kicks off. Google’s stock price has been volatile based on market fluctuations, Department of Justice concerns, fears about losing focus after the announced deal to acquire Motorola, and fear that a recession would slow search and display revenues. The above fears failed to materialize and Google continues to excel in terms of internet related innovation and vision. Wall Street estimates were much too low for the current quarter and Google beat pro-forma EPS by about $1 or 10%. The Q3 earnings conference call is worth a listen for all investors. The shares closed at $559 but quickly traded up to $595 in after-hours trading.

Starting with the top line revenues, Google reported the strongest revenue growth rate in 14 quarters. Total sales grew 33.4% and revenues ex traffic acquisition costs grew by 37.1%. Google is undergoing a year of investment and there are a number of initiatives which are ongoing in this regard. Google announced an across the board 10% raise for all the employees for this year, the company has been on an aggressive hiring spree, Motorola is being acquired, R&D spending is up over 40%, and Google is also spending aggressively on marketing for Google Offers, Google Wallet, Chrome, and mobile search initiatives. As a result of all the investment, operating expenses continue to grow in the vicinity of 50% which is considerably faster than sales. The spending growth has been signaled and has been expected this year but what has been underestimated is the sales growth. Even during an “investment year” Google is growing their EPS in the low 20s percent range and earnings growth is likely to accelerate next year as sales growth remains high while some of the investment and expense growth abates. The primary reason the stock is set to perform is that Wall Street is dramatically underestimating Google’s potential into the future.

The current quarter saw revenues ex-TAC grow by 37% and next year the Wall Street consensus is for sales to grow only 22%. This is the primary bullish catalyst for the stock price – the inappropriateness of current revenue forecasts by the street. There has only been one year in the corporate history of the company where sales grew slower than 26% and that was during the financial crisis. It looks implausible to me that sales growth slows to 22% next year given all the investments at present unless we are in a deep global recession. Expect Wall Street sales, earnings and price targets for the stock to move higher tomorrow morning.

Here are 7 of the business model drivers, some of which were discussed on the earnings call, which give me some conviction that Google will maintain a high sales growth rate well into the future:

  • The shift from traditional media advertising to digital display and search advertising is still in the early stages. Most of the companies I follow in the consumer discretionary, consumer staples, and industrial space are talking about the benefits from both a cost and effectiveness standpoint to shifting advertising budgets towards the internet. I expect these trends to continue for years.
  • Mobile search and advertising is a nascent business which Google is dominating. The Android platform was a brilliant conceptualization in order to capture high market share of mobile search which drives mobile advertising revenues. This is the way of the future. Google grew its mobile business from a run-rate of $1B to a run-rate of $2.5B in just a year. Wow!
  • Chrome is now the number two internet browser after IE. The advertising campaign for Chrome has been brilliant and the product itself is faster, more reliable, less prone to viruses, and better. Virtually all of the search which is conducted on a Chrome browser is with a Google search engine.
  • You Tube has been growing at tremendous rates and Google is in the early stages of creating an integrated video model which provides content to user over a variety of mediums.
  • Google+ is the start of Google’s foray into social media and I believe this will emerge as the alternative to Facebook platform.
  • Google Wallet and Offers are extremely important areas where Google has massive business and technology head starts and will position the company well to participate in the explosive growth of e-commerce which continues to move mainstream.
  • Emerging market growth is just beginning to move the needle – non US growth was up 41% this quarter vs the US which was up 26%. Brazil and India were discussed on the conference call as very important and strong markets. Existing investments and technology will be monetized with very little incremental capital investment which is a textbook driver of shareholder returns.

Google is one of the most innovative companies in the world that traded to recessionary valuations based on a jittery and cynical stock market. Google’s growth is internally driven and not dependent upon outsized GDP growth around the world. Google is at the forefront of change and the company’s past investments, brand equity, and talent will foster continued success. The shares closed at an all-time of $741 back in late 2007. Since then, the company has more than double earnings, generated 10s of billions of dollars in cash, and made valuable acquisitions such as Postini, Admob, Admeld, Zagat, and Motorola. Google is positioned to thrive in the future and is one of the best secular growth companies in the technology space.

Share Button


  1. kevin on October 14, 2011 at 12:48 am

    cool follow up and great call on google. i like your other call GES/guess too and would love to see a follow up to it!

  2. crackerjack on October 14, 2011 at 11:18 am

    Thanks for the positive feedback Kevin. Any individual stock which i place on my “focus list” are live investment themes so long as they are “open”. If I change a viewpoint I will clearly post it. GES has pulled back sharply from the high 30s so this is going to take some time to play out. The lead weight for GES has been some outsized exposure to Italy which is obviously in a tenuous economic situation. I believe fears are overblown and still like Guess as a growth stock. I’ll do a detailed follow up after they report.

    Lastly, I have been posting some content on a sister-site called “CJ’s”. I wanted to place really quick thoughts, previews, charts, etc here. So you may be interested in keeping an eye on this content as well. I posted the preview for Google into the quarter there:


  3. kevin on October 14, 2011 at 2:33 pm

    thanks for pointing out to http://crackerjackinvesting.com/ . great stuff! i really like GES and am long @ 27.19 . looking forward to your followup after report!

  4. esin on October 14, 2011 at 3:34 pm

    Any thoughts as to why the growth rate in revenues vs revenues ex-TAC was so large this quarter? What are the expectations for traffic acquisition costs going forward?


  5. kevin on October 24, 2011 at 12:19 pm

    loving being long on GES now (from @27.19)!

  6. crackerjack on October 24, 2011 at 6:11 pm

    VF Corp (VFC) had a strong start to the earnings season. They mentioned very strong business trends in Europe across a number of categories and countries. Moreover, VFC called out some strength with “7 for all mankind” denim. Hopefully this is a solid read that premium denim is selling strongly and Guess benefiting.

Leave a Comment