The struggle between short-term thinking and long-term investing continues

Yesterday after the market close, Google reported its Q1 results for 2014 which Derek Kessler nicely summarized already. While its clear that Google is growing the top line in a very healthy manner (19 percent year over year growth), Wall Street was disappointed and the stock is trading lower today. In my usual form, I’d like to touch on what I pulled out of Google’s quarterly conference call and how Wall Streets’ reaction fits into the picture.

Let’s take a quick look at the numbers. Google reported earnings of $6.27 per share on revenue of $15.4 billion. Analysts (on average) expected $6.40 per share on revenue of $15.52 billion, which means Google "missed" its earnings number by 2 percent and its revenue number by 0.8 percent.

The growth metrics are what really have Wall Street bothered. Revenue grew 19 percent, but earnings only grew 4.5 percent. When people see this they instantly worry that expenses are growing too fast compared to revenue. Because Google is involved in a ton of projects that are not directly connected to the main advertising business, the market is concerned that future growth will not be as profitable as the current business. Therefore future growth is worth less, and therefore the stock is worth less.

That’s the logic. Except that this “logic” is decided in nanoseconds after the press release hits the wire. Investors pounce all over a supposed earning “miss” without really thinking about the long term. That’s Wall Street for you. I suggest you ignore it and focus on long term investing. That’s what I do, and being a Google shareholder has served me well.

The reality of the situation isn’t nearly as concerning as Wall Street would have you think. Remember Google bought Nest in Q1. This was a fairly big transaction that came with some one-time legal expenses. Excluding those fees, Google says expenses were in line with expectations.


More short-term hijinks from investors ignores the continuing long-term promise from Google.

Even despite this, I’m sure it is true that Google is spending money on things that are not nearly as profitable as the advertising business is today. Wall Street seems to have a problem with this because most of the pros care only about next quarter. I care about the long term business, just as I imagine Larry Page and his team do. They are not running the business to please Wall Street nor should they.

Let’s think about this in very simple terms. Google has a solid track record for turning its investments into dollars. It's already doing amazingly well in digital advertising, yet there is so much opportunity for Google to do more. I expect it to invest in more projects. For someone to worry that there isn’t immediate revenue (and therefore near-term earnings dilution) is ludicrous. All new projects involve up front spending with no immediate revenue. Google just happens to have lots of these in the pipeline right now. As a long-term investor I think it's great.

During CFO Patrick Pichette’s prepared remarks he commented on four areas the company is investing — Android, Chrome, YouTube and Enterprise. Given the low-cost nature of Chrome OS devices and their ease of management, I believe Google has a huge leg of growth in the enterprise market over the next decade. It would not surprise me if Microsoft’s operating system lost its majority market share of the desktop PC market in the next decade. But I also don’t think we’re anywhere near the peak when it comes to Google’s consumer-oriented businesses.

Pichette disclosed that Google paid four times as much to developers in the Play Store in 2013 as compared to 2012. That’s impressive growth. And Google Play Games has 75 million new users in the last 6 months. What happens next? I think Android will become a serious gaming platform in the set-top box market. I think developers who have signed up to bring their apps to Chromecast will open more revenue opportunities.

My money's not going anywhere. Google's still a good buy.

And in the meantime, Google still has incredible growth opportunity left in the advertising market. Industry data suggests that Google controls somewhere between 10 percent (in the US) and 20 percent (in the UK) of the total advertising market (this was brought up by an analyst on the conference call). Google believes (and I agree) that digital advertising has a much better return on investment compared to TV advertising. It’s also easier to measure cross-platform results. I think the next decade will bring with it a massive shift in where advertisers spend money on campaigns, and Google will be a huge beneficiary.

Google is consistently pulling in better than 10 percent growth and has truly incredible growth potential ahead. Yet the stock trades at about 17 times next year’s estimated earnings.

In my view, the stock remains a bargain. I’m staying long and strong.


Reader comments

Wall Street may not like the quarterly results, but Google is still powering ahead


Enough with the apology, Apple gets killed every quarterly earning no matter how good their financials are. That's the name of the game and frankly the reason I think going private should be their number one priority. Wall street vision does not align with those companies long term bet and goals, they don't care about the companies long term health, they just care about ROI. Google is not the first and certainly won't be the last, you can remove google's name and replace it with a few other companies and it would be the same. That's wall street for you.

Exactly. People who get rich moving money around decide in a split second that they aren't getting enough money not producing anything, waaaahhhhhh.

Wall street just want money and money quickly regardless of future investments, if costs are high and profits low only few invest but as you said in the article - Google invested in Nest - Motorola the year before and multiple robotics companies so it looks like a future investment might pay off?

Posted via Stock Nexus 4*

I agree, investors only care about short term profits. If someone wants to sell Google stock, let them. Someone who is smarter will be buying it.

Great article!! I enjoy reading these. They do a great job of explaining without being too technical with the finance and accounting jargon.

Posted via Android Central App

I am so sick and tired of it being all about the next quarter. Google is investing for the future, but investors want a big return on their investment the second they put it in. Google is not the only one with this problem, it is the state of the world today.

Companies that don't plan for the future will probably not be around to see it.
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Wall Street probably hated the upfront costs when Google acquired AdSense and Android too. How'd that work out for Google's revenue?