On Thursday, Google faced the embarrassing situation of seeing its Q3 financial results released prematurely. The stock tanked on the results, and Google asked to have trading stopped temporarily. I’ve already seen one story suggesting that the early release “wiped out $20 billion in valuation.”
But let’s get real. The loss has nothing to do with the accidental release. It was someone else’s mistake, not Google's, and anyone on Wall Street knows that the real reason Google was trading down was the quarterly miss.
Stocks -- or, more accurately, investors -- always react to quarterly results. Analysts keep detailed models of their expectations, and the average of these models is known as the “consensus estimate.” If you miss consensus, as Google did, you get punished. It really means nothing in the long term, but it gives financial media types something to get excited about for a few days.
So, Google did something the pros call “shitting the bed.” The most important headline number is earnings per share, where Google came in at $9.03 (adjusted) versus the consensus estimate of $10.65. Big miss.
Of course the way Wall Street reacts is not in alignment with how long-term investors think. And as I’ll explain, Google’s actual results are just fine. The business is doing well. But the short-term thinking in the markets has people convinced that Google isn’t a growth company anymore. Depending on your perspective, this is either hilarious, or a truly sad sign of how bad humans can behave like sheep.
Short-term lulz, not long-term analysis
I looked at the news posted on Google prior to the conference call earlier on Thursday afternoon. Sadly, more people were interested in talking about #PendingLarryQuote -- the telltale mark that the earnings were published unfinished -- than anything else. It just shows how much journalism has turned into entertainment, even (or maybe especially) on the financial side of things.
My personal vote for “best blog post” on Google’s financial situation ahead of the conference call was from Barons. Mid-day, it was this blog post that made it quite clear how Google’s miss was largely a result of the Motorola acquisition. Depreciation charges were higher than analysts expected (these are a non-cash expense), and Motorola lost money versus some analysts who expected the company to be profitable.
Now that the trading day is over and I’ve put my kids to bed, I’ve had a chance to listen to Larry Page and Patrick Pichette discuss the financials on Google’s quarterly call. They did an exceptional job.
One of the big items that never gets reflected in headline numbers is foreign exchange. Google is an international company -- but it reports in U.S. dollars. So fluctuations in currency exchange rates -- very much outside Google's control -- affect its financial results. That’s why most big global companies also report “constant currency” results. Because no public company can control currency rates, it’s helpful to know what growth would have been in the absence of currency movement.
Google, as a standalone business and excluding Motorola, grew 19 percent year over year. That’s nothing to sneeze at. But without currency fluctuations, that would have been an even more impressive 24 percent, a point the execs tried to drive home during the conference call. Not too shabby.
As an advertising company, people are happy to see that paid clicks are up 33 percent year over year. But with the revenue per click dropping 15 percent versus last year, Wall Street freaks out. So it’s nice to know that on a constant currency basis, the drop would be 8 percent. Not so bad.
Now consider that Google sees a bit less revenue on mobile ads (growing faster) and less revenue from developing markets (also growing faster), the real issue is one of mix. Google’s revenue is more and more diversified from sources where revenue per click is lower than in the USA. That’s fine by me. It’s still profitable growth, and on the back of 24 percent constant-currency revenue growth, I’m very happy.
A 220 percent increase in mobile
Now let’s talk about mobile. Because monetization of mobile is a big issue. One year ago Google told the markets that its mobile advertising business was at a run rate of $2.5 billion per year. How about the most recent quarter? Well, Larry Page proudly announced that Google now does a run rate of $8 billion in mobile revenue.
Repeat: That's $8 billion. Up from $2.5 billion. That's a 220 percent increase. How do journalists have the balls (or lack of intelligence) to say that revenue is dropping? Are they drunk when they write this stuff?
Yes, the $8 billion figure now incorporates Google Play (app sales and content sales). But Google’s CFO Pichette was very clear to say that the “vast majority” of the $8 billion is advertising revenue. And Larry Page has been clear in saying that monetization of mobile traffic is now a significant percentage of what they earn from desktop traffic. That, and he fully expects mobile traffic to end up being monetized to a greater extent than today’s desktop traffic.
Bold claim? Maybe. But Google is growing, Mobile revenue is on FIRE, and from where I set Google is still the only company that matters in online advertising.
Overall, I’m happy with Google’s results (and I’m a shareholder). I’m not surprised at the Street’s short-term focus on headline revenue and earnings. I don’t see any chinks in the Google armor.