Google (NASDAQ: GOOG) reported third-quarter earnings and the positive results have sent the stock soaring. Google easily beat analysts’ estimates, with non-GAAP EPS and consolidated revenue up 21% and 12%, respectively, from the year-ago quarter. Shares have jumped more than 10% today on the results, crossing over the US$1,000 mark for the first time. Is the big leap warranted? A mobile story As Internet usage continues to shift to mobile devices, investors have been keeping a close eye on how it will affect Google’s business. This quarter, investors gained a bit more insight into Google’s mobile progress, and it’s looking pretty good. One…
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Google (NASDAQ: GOOG) reported third-quarter earnings and the positive results have sent the stock soaring. Google easily beat analysts’ estimates, with non-GAAP EPS and consolidated revenue up 21% and 12%, respectively, from the year-ago quarter. Shares have jumped more than 10% today on the results, crossing over the US$1,000 mark for the first time. Is the big leap warranted?
A mobile story
As Internet usage continues to shift to mobile devices, investors have been keeping a close eye on how it will affect Google’s business. This quarter, investors gained a bit more insight into Google’s mobile progress, and it’s looking pretty good.
One of the key stories in the earnings call focused on Google’s new Enhanced Campaigns, now available for all advertisers to be used on all devices. Enhanced Campaigns gives advertisers a seamless way to develop multiscreen ad campaigns — a key advantage for Google in mobile advertising. As it’s Google’s most important strategy in its transition to mobile, an update on the effort was sure to be scrutinised.
Analysts were concerned the transition to Enhanced Campaigns could have negatively affected the quarter, but the evidence is largely to the contrary. In the company’s third-quarter conference call, management said that clients like the system and advertisers are bidding more frequently in mobile keywords. Thanks to new cross-device measurement tools and analytics, Google was able to provide several concrete observations.
- Mobile is driving increased conversions. Google cited American Apparel as an example, which says it saw 16% more conversions on mobile in Enhanced Campaigns than it expected. As a result, “they’re now investing more to drive sales,” according to Nikesh Arora, Google’s senior vice president and chief business officer.
- Mobile advertising prompts more phone calls. Monthly calls from Google ads are up 100% from a year ago.
Beyond these concrete examples, management generally communicated that Enhanced Campaigns is doing very well. This is great news for investors. Now, they can rest assured that it really is possible for Google to successfully run a campaign with one single interface and a unified mechanism across multiple devices. Not only does it make the process of building campaigns easier, but it enables advertisers to get a better idea of the return on investment in a multiscreen environment.
As the company transitions to new, more competitive mobile territory, however, Google’s cost-per-click, or CPC, continues to fall. CPC is the average amount of money per click advertisers are paying Google when someone clicks on their ad.
Source: Data retrieved from SEC filings.
The third quarter’s 8% year-over-year decline in CPC was sharper than analysts expected, but it’s probably because advertisers are transitioning to mobile faster than expected. During the earnings call, however, management said that as its Enhanced Campaign develops further and ROI begins to prove the platform’s worth, CPC could begin to trend upward again (at an unspecified time in the future) as advertisers shift a larger portion of their budgets to mobile.
Soaring paid clicks and rapidly growing revenue at Google sites
If declining CPC still leaves you concerned, fear not; paid clicks soared… again. Paid clicks, which refer to the clicks on ads on both Google sites and Google network sites, were up 26% from the year-ago quarter and 8% sequentially. Last quarter, paid clicks were up 23% from the year-ago quarter and 4% sequentially.
What makes this quarter’s paid clicks exceptionally exciting, however, is that much of the clicks probably came from Google’s sites, and not its network sites. Literally all of the quarter’s ad revenue growth came from its more profitable Google sites (68% of revenue) while its network sites’ (23% of revenue) ad revenue growth was flat from the year-ago quarter. Thanks to tougher quality controls on its network sites, many advertisers shifted their spending to Google’s sites. From the year-ago quarter, Google site revenue was up 22%.
This spending shift to more profitable Google sites was the biggest driver of the company’s outperformance, according to Gartner analyst Carlina Milanesi. It helped Google beat analyst estimates for US$14.80 billion in revenue and US$10.35 in EPS with US$14.9 billion in revenue and US$10.74 in EPS. And, more importantly, it reinvigorated Google’s bottom-line growth story.
Source: Data retrieved from SEC filings.
YouTube’s explosive growth
YouTube, which falls under Google sites revenue, continues to grow rapidly. As the number of hours people watch and the number of videos people upload continues to rise, consumer packaged goods and entertainment clients are ramping up their ad spending on the platform, according to management. In fact, spending by consumer packaged goods clients “has grown over 75% over the past two years,” according to Arora.
The transition to mobile is going well, too. Now almost 40% of YouTube traffic comes from mobile, up from 6% just two years ago.
Solid as ever
With a huge uptick in Google sites revenue and a clearer path than ever to a multiscreen environment, investors can be even more certain in the company’s future. Much of this strengthened confidence in the company has already been recognized, with shares trading more than 10% higher today.
Of course, everything isn’t rosy over at Google. Motorola losses are now approaching an annual run rate of US$1 billion. Though that’s fairly small when compared to Google’s 2012 bottom line of US$10.8 billion, the loss is actually widening, not contracting — so it’s something to keep an eye on.
That said, Google’s overall business is looking as solid as ever. Even at $1,000 the company remains a solid core stock that investors could likely hold for decades. Trading at about 30 times earnings now, however, investors should use discretion in deciding whether or not the stock is a buy. But it’s certainly not a sell.
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A version of this article, written by Daniel Sparks, originally appeared on fool.com.