But if there's one company it needs to look out for, it's Facebook

Google on Thursday reported its second-quarter results for fiscal year 2014. We already posted a brief summary of the numbers, and now it's time to dive a bit deeper. Let's the the disclaimers out of the way: I'm a Google shareholder and have been for many years. I'm optimistic on the company's outlook and while I will continue to hold my shares (probably for many more years), I'm not recommending any specific actions to anyone else.

While Wall Street loves to micro-analyze quarterly results. I prefer to look at them in the context of long-term growth. From the angle of an investor (rather than a stock trader) I am quite satisfied with the company's performance and opportunity set going forward.

Analysts expected Google to post $15.6 billion in revenue compared to the $16 billion it actually reported. So that's a small positive surprise. But on the earnings line, analysts thought Google would post $6.24 earnings per share (EPS) while it actually posted $6.08. This is about a 3 percent shortfall relative to the best guess of the analyst community, so it's hardly a big miss. What matters to me is that Google posted 22 percent growth year-over-year. Google has been posting results like this quite consistently, which tells me Google continues to be well-managed in a world where there is plenty of opportunity for the company to take advantage of.

With most of the company's revenue coming from advertisers who pay for clicks, it's worth looking more closely at that piece of the business. The trends that we've been seeing for some time are continuing. Specifically, for Q2 F2014 Google saw an increase of 25 percent in paid clicks. The increase was concentrated towards Google's own sites (33 percent growth), while it saw less growth coming from partner sites running Adsense. Also, it was no surprise to see the revenue per paid click drop 6 percent year over year.

No, this is not a sign that advertisers are willing to pay less and less for clicks, but instead a result of device and geographic diversity. Google's growth is faster outside of its largest markets (U.S. and the UK), and paid clicks generate less revenue in emerging markets. The same goes for mobile … advertisers generally pay less for clicks coming from mobile device users, and the growth of mobile traffic is higher than growth of desktop traffic.

All things considered, Google's core advertising business seems to be doing just fine. I expect it to keep growing for many more years because the balance of ad dollars is still overweighted to old media formats including print, and to a lesser extent, TV. I think more ad dollars will continue to flow to the online channel where Google dominates.

Google's core businesses are doing fine, and Google Play is growing. But Facebook may be a growing threat.

Management didn't have too much to say about Android during the conference call, but I will note that the "other revenue" segment reached $1.6 billion for the quarter, or 10 percent of total revenue. The company commented that most of this growth was driven by the Google Play Store. This 10 percent chunk of Google's business also happens to be growing at 53 percent annually as of the most recent quarter. Not too shabby.

Looking at the stock, Google trades at about 21 times this year's forecast earnings. With the business still growing north of 20 percent I'm more than happy to hang onto my shares. With more and more ad dollars flowing to the online space and Google's other businesses showing long term promise, I feel the stock is a bargain. I don't think investors are paying anything for exposure to the Internet of Things which includes home and automotive automation.

If there is anything that worries me (even slightly), I'd say Facebook is going to give Google a run for its money in online advertising. In what seems like no time at all, Facebook has developed a very impressive ad platform. And when I'm on my mobile phone I figure I actually spend more time on Facebook than searching Google. I don't think I'm the only one, either. It took me a while, but I finally figured out that I'm best off to own shares in both companies, not just Google.

Going forward I will be paying a lot of attention to the Internet of Things. I believe it's obvious how important the industry will become, yet it's at such an early stage of growth that we aren't paying for huge expectations baked into stocks like Google.

I think Google still has loads of growth ahead.


Reader comments

Stock Talk: Google earnings show there's still plenty of room for growth


Agreed! :)

But one think I noticed is that my friends are not accessing facebook as often as one year ago and even less from 2 years ago. Some of them are leaving facebook for good. Maybe it is just my circles of friends, but tells us something.

It's called aging though you are getting older just like your friends Facebook is not only getting old to you but more irrelevant while the population is growing, my adolescents are becoming of age to utilize the service Facebook is for business usage and specific she groups

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Tech sites and the main stream media reported a couple months ago that Facebook is losing the newer youth culture and seeing an exodus of younger people 18-30. As the youth move away from FB it is going to be hard for FB to get targeted demographics when losing a key demographic group.

And if you look at FB past ventures, they have all seemed to fail. I would take it with a grain of salt when thinking that FB has any chance whatsoever at giving Google a run for their money. I'd be more worried about Alibaba over FB.

I spend next to zero time on Facebook these days. If Google would develop a MigrateFromFacebook tool, we could get more people over to Google+, the better, ad-free platform.

Fun Fact: Most people still post on FB everyday. You're are simply a minority. Just like most people use Google search, while a minority use Yahoo and Bing.

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Yes - this. An important investing premise is to think about the actions of the actual population not your own isolated situation. Sometimes you are doing things in common with the majority, but it does not matter. My own behavior and yours is irrelevant to investing. The quantifiable details are that Facebook has an enormous and growing audience of active users. So does Google, of course, which is why I own both stocks.

Most people you connect with in FB. I have never used FB except for once and people I have seen and talked too rarely ever use it anymore if at all, but everyone I know is in their thirties and have productive lives going on.

The only people I know of that use FB anymore or even a daily basis are people in their 50's and over, like my friends parents.

Plus there were articles that FB has lost and is losing more of the Youth culture and kids choose other social sites instead of FB while those 18-30 are leaving FB. Once the Youth culture abandons it so do the rest of the people and advertising as well.

I challenge anyone to name one FaceBook project that has succeeded other than FB itself.

What growth?

Google has introduced so many projects in the past 5 years and it still hasn't brought as much growth to Google as they should. I'm fact, their profit margins have been slowing down for almost a year now because of their lack of monopoly in mobile advertising and competition like FB in that arena. More and more people are using PCs less(where that constitutes the majority of Google's bread and butter) and it's clearly affecting Google.

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The boys that run google have not really focused on making $$$. Once they finally get serious, they will be fine. Smart people without a doubt but not really focused on business yet...

Yeah, that 22% growth YoY is really killing Google.
Ye gods you're stupid sometimes. Everyone knows you hate Glass, just stick your head in a bucketful of sand and sing your "LA LA LA" song while the rest of us live in reality.

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I can say that I open the Facebook app more than I search for something but by Joe and if I had to choose between the two will I back Facebook. Nothing against Facebook but there is too much use for everything Google offers. Maybe MySpace will reign again, ha.

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It's "by Jove", not " by Joe". Props for trying to use the obscure exclamation though.

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I just wish I could actually use g+ instead of facebook every just doesn't play out the same way when you compare the social networking aspects...g+ feeles tedious at times...its lovely for exploration...just being far as staying in touch with people I think the platform needs help...but...<shrug> who am i :)

You're one person. Whose experience counts about as much as mine as one person. Personally I find the experience much better, both for discovery and for keeping in touch. G+ doesn't go nearly as far as Facebook does in filtering the info in your feed.

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