The mother ship behind Android (that'd be Google) reported its Q4 earnings on Thursday, and while there isn't a lot of Android-specific news to consider form the report (we did get small nuggets on the Nexus 6, Google Play usage and and Chromecast use), I know many of you are interested in Google as a whole, or even Google as an investment. So my mission here, as usual, is to summarize some of the most important data points and comments coming out of the earnings release and analyst conference call.
To frame this discussion, I think it's important that people keep in mind Google's tradition of focusing on long-term projects. Google's founders control a large block of multiple voting stock, and this capital structure was designed with control in mind. Larry and Sergey don't want Wall Street forcing them to worry about short-term performance. They want to be free to make very long term investments in projects that they expect to yield results way into the future.
We can look at projects like Google+ or Google Glass as potential failures. We can remind ourselves of all the beta products Google built only to shut down later. If we do this and act like the company's track record is poor, we are acting exactly opposite to how I believe successful entrepreneurs act. Any great business leader will tell you that it's important to fail at things. If you are not occasionally failing, you are not going after big enough goals.
Google capitalized on search, and then on advertising. That business, AdWords, is still rock-solid, growing, and important to financing Google's future. If it were not for Google's willingness to re-invest advertising profits into other products we would not have Maps, Gmail, YouTube or even Android. And we certainly wouldn't have whatever is coming next.
With that in mind let's look at the Q4 results.
There are dollars, and then there are dollars
A rising dollar may sting, but it's also a red herring.
Google brought in $18.1 billion in sales for the quarter, which is 15 percent higher than Q4 2013. It's important to point out that the U.S. dollar has been very strong lately. And because Google generates revenue in many different currencies, which are then converted back to U.S. dollars for financial reporting, a rising U.S. dollar means Google's revenue takes a hit. Google and practically every other large U.S. company is dealing with this same problem. As a long-term investor I tend to ignore currency fluctuations because I can't predict them, and they really don't mean anything to our evaluation of how the actual business performed.
Investors often talk about "constant currency" performance, which just means we pretend as if the U.S. dollar did not move at all compared to other currencies. It's not real, but since we can't hold management accountable for currency moves (whether they help or hurt growth), we ignore these changes to judge the growth that management was responsible for.
Google actually grew 18 percent on this constant currency basis. For a very mature company I'll take that kind of growth any day of the week.
There are clicks and then there are clicks ...
As I mentioned earlier, Google still brings in most of the bucks via digital advertising. Google gets paid when someone clicks on an ad, and paid clicks are still growing nicely on Google's owned sites. Paid clicks are up 25 percent year over year. Unfortunately, paid clicks on partner sites were down 6 percent, but it looks like this was largely due to one of Google's cleanup exercises, where the company takes a short-term hit to ensure it isn't doing business with shady or low-quality sites.
We're slowly seeing Android make money for Google.
Google's traffic acquisition costs continue to drop as a percentage of advertising revenue, which is great to see. The company's overall adjusted operating margin was 31 percent for an operating profit of $5.6 billion in Q4. Solid performance.
While management didn't spend much time talking about Android performance on the conference call, some nuggets of interest did appear. For example, Google told us that 15 percent of organic searches on Android devices now result in Google's search engine returning deep links to Android apps. (Which is how you see the Android Central app being listed in search results.) Google can tell if a users is on an Android device and let advertisers buy traffic accordingly. If you conduct a travel search on your Android phone you might notice a Booking.com ad prompting you to instal the app or re-engage you with their service.
I suspect it's still early days here. Yes, more people are spending time inside of the leading social media apps like Facebook. But organic search will never go away. It's still important and something that most of us use daily. As we spend more and more time on our mobile devices, Google should be able to keep helping advertisers drive traffic to wherever it makes the most (dollars and) sense. This is how Android makes money for Google.
Also, when it comes to mobile devices, Google disclosed that YouTube revenue derived from mobile users is up more than 100% year-over-year. This is impressive, and it's important to keep in mind that YouTube is actually the world's No. 2 search engine.
Google earned $6.88 per share on a non-GAAP (adjusted) basis in Q4. If we were to multiple this by four to achieve an annual run rate, we'd get $27.52. For this year analysts expect earnings per share of almost $29, and growth above $33 for fiscal 2016.
With a stock price around $528 as I write this, Google trades at a price to earnings ratio just over 18. Considering the company's healthy growth rate, I still feel this is a relative bargain. I'm happy to remain a Google shareholder. But keep in mind I also have a fairly well diversified portfolio in the technology sector and I also own shares in several Google competitors including Apple, Facebook, and Amazon.
Put the internet to work for you.
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