The recent quarterly financial report from Google Inc. (NASDAQ/GOOG) certainly disappointed investors, as the stock’s share price plunged following the release. The question then is: are Google’s corporate earnings in jeopardy of declining due to a loss of market share to other technology stocks, or was this just a market that expected too much?
For the third quarter of 2012, which ended September 30, the company reported revenue was up 45% from the year-ago period. Total revenue for the quarter was $14.1 billion, with Generally Accepted Accounting Principles (GAAP) corporate earnings coming in at $2.2 billion, a decrease from the $2.7 billion during the same quarter in 2011.
While the firm did see increases in both site revenue and network revenue by 15% and 21%, respectively, over the same quarter in 2011, these are decreases from substantially higher levels in prior years. While Google is still growing its core business at a reasonable rate, this might be a sign that things are beginning to slow down.
While paid clicks increased, the cost per click decreased and traffic acquisition costs increased. This is one reason why Google’s corporate earnings decreased this year, in addition to currency losses due to fluctuations in the U.S. dollar. A big part of losses also comes from Google’s “Motorola Mobility” division. Motorola’s corporate earnings saw a decline of approximately 20%.
The big question going forward for both Google and other technology stocks is how they will drive corporate earnings from their mobile divisions. As more consumers view information on the Internet from mobile devices, if technology stocks are unable to drive corporate earnings then their share prices will certainly suffer.
Chart courtesy of www.StockCharts.com
Following Google’s third-quarter results, investors were obviously not pleased as the share price sold-off tremendously. Having said that, looking at the fundamental metrics, we can see the stock is trading at a forward price-to-earnings ratio of just over 14.0 and a price-to-book ratio of 3.2. Compared to some of its peers, it’s certainly not expensive. With a quarterly growth rate of over 45% and a profit margin of over 22%, Google is certainly not one of the technology stocks that are going away anytime soon.
Considering the growth of its “Android” mobile operation platform, if Google is able to monetize the mobile division effectively, this could be an extremely strong driver for corporate earnings for the next decade. I think many investors have been waiting for a sharp pullback such as this to consider accumulating Google, as leading technology stocks rarely give investors an opportunity to buy at a discount. I would probably wait to see greater clarity regarding their mobile strategy before buying.