For those of us whose idea of fun includes reading financial reports from tech companies, Google posted its fourth-quarter 2013 results on Thursday. And because Google generates the vast majority of its revenue by selling advertising, it should come as no surprise to you that discussion of Android was not a focus of the call. When I write these quarterly results summary articles, I'm doing so to share my thoughts on Google the business and relate the results back to the stock in a way that helps newbie investors understand a bit more about long-term investing. I also own a bunch of Google shares. End of disclosure.
Google's Q4 results, in a nutshell, were solid enough to send the stock higher in after-hours trading Thursday night, which means Wall Street loved the numbers. On Friday morning the stock was up about 3 percent, while the broader indices (i.e. Dow Jones, S&P 500 and NASDAQ) are down.
Let's dig into the numbers a bit and then discuss the longer-term picture.
Revenue for the whole business was $16.9 billion, up 17 percent year over year. This, of course, includes the money-losing Motorola division, which is shrinking (and about to be jettisoned anyway). So what I care more about is the pure Google business, which pulled in $15.7 billion and grew 22 percent year over year. For a company the size of Google, this is impressive growth. Can you imagine Coca Cola or Proctor and Gamble growing that much, that fast? Neither can I.
There's nothing wrong with more clicks for less money.
Two-thirds of this $15.7 billion in revenue came from Google-owned sites. Obviously the big one is search — google.com — and I'm guessing the second biggie is YouTube. Did you know YouTube is the second biggest search engine in the world (after Google)?
Another 23 percent of Google's core revenue comes from partner sites. Mobile Nations is a good example. Some of the ads displayed come from Google's inventory (i.e. Adsense), and Google shares the revenue generated from ad clicks with these partner sites — Android Central, CrackBerry, etc. This is an area where I think we'll see increased competition in the future. Facebook, Twitter, Amazon and others likely will (and, indeed, are) ramp up their advertising tools to let website owners pull in ads from their inventory, too.
Analysts pay a lot of attention to paid-click metrics, and for good reason. The amount of money that Google can bring in, per click, is an important trend. It's not so important in any particular quarter, and quite often Wall Street freaks out over minor drops in revenue per click when Google clears out crappy advertising from its system. But any trends here obviously matter to the long term health of the business. In Q4, Google generated 31 percent more paid clicks year-over year, but the cost per click declined 11 percent.
This decline in cost per click has become a trend. More often than not, Google sells clicks for less money, not more. So is this an issue? I don't think so. If you look at what's happening under the covers, Google is seeing very strong international growth. If you exclude the U.S. and UK from sales, the growth rate was 33 percent. Most of these international markets generate less revenue (per click) than developed markets. We see the same thing when we look at Facebook, which also reported results earlier this week. Specifically, Facebook brought in more than $6 per user in the last quarter among its U.S. and Canadian user base. But, for example, in Asia the average user brought Facebook only 95 cents. My conclusion is that online advertising is just not as profitable (per user) in emerging markets today. But the margins are still incredibly high and it would be dumb to ignore global growth in order to show cost per click numbers that look more impressive.
Keep a close watch on what Facebook, Twitter, Amazon and others are doing with ads, too.
In other words, I care about total profit for the company, not average profit per user, no matter what Wall Street worries about on any given day.
Earnings per share for the quarter were $12.01 and that wraps up 2013 with total EPS of almost $44. Analysts are modeling earnings of about $52 this calendar year, meaning that the stock trades at 22 times earnings. With the growth rate Google has been experiencing, I love the idea of holding onto the stock for another decade. Longer term I think a lot of ad dollars currently spent on TV, radio and print media will shift towards online campaigns.
Google and Facebook are probably the two biggest beneficiaries of this, and I see Google as a very reasonably priced stock considering the growth potential from existing ad platforms, and then supplemented by new innovations on Android, Chrome, YouTube and even Google Glass.
Put the internet to work for you.
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