Google – undemanding valuation against a backdrop of overvalued social media plays

3 mins. to read

The rapid decline in Facebook’s share price since listing has brought about headlines of a new bubble in ‘social media’ companies. Certainly there may be some merit here as Facebook and others have yet to prove their ability to monetise their massive databases on the scale which has been forecast. This burden however does not extend to the better established tech stocks such as Google, which made $2.8 billion last quarter.   

Google shares have been a big outperformed during the past couple of months in the wake of a reassuring quarterly earnings announcement and continued action in terms of bolstering their already dominant position in the growing digital advertising space.

The company hit earnings targets from the streets’ analysts as they fine-tuned their internet search technology to lure more web surfers to click on their important revenue-generating ads. Indeed, in the trading session immediately following their earnings announcement Google shares added more than 3% in value and have since continued to move northwards.

Google brought in $2.8 billion in the last quarter, translating to $8.42 of earnings per share to the three months ending June, a nice bump from the $7.68 per share in the equivalent quarter last year. Being the first quarter that the significant Motorola deal has been included in the accountings there will be some variability over the next few quarters as the acquisition muddles the numbers for the company. 

Earnings per share would have been $10.12 per share if not for accounting hits taken from employee stock compensation and the Motorola deal, slightly edging past the $10.10 adjusted earnings per share consensus anticipated.

Overall, revenue climbed 35% from last year to $12.2 billion in the quarter; taking out Motorola it would have still been an impressive 21% increase in sales.

Second quarter numbers got a boost from technology tweaks that show more advertising links when the magical Google search equation determines a user’s request. These are targeting the desire to undertake a commercial transaction such as buy a product or book a vacation. Google has demonstrated that it has an edge in interpreting individual requests so that it can provide bespoke ads to fit their preference.

Total clicks on Google ads surged 42% compared to the comparable quarter last year, which is important as Google generally only gets a cash infusion when the web surfer clicks on an advertising link. This was the most impressive performance on this measure since the company began report on this metric around four years ago.

The increase in traffic is very important as most net advertisers are facing a decline in the amount it gets paid for each individual advertisement. The average price per click declined by around 16% per click from the year before and is a problem prevalent in the industry.

The decrease in revenue per click has been trending downwards for a few years and seems in part at least to be due to the fact that more web surfing is being done on mobile platforms such as tablets and smartphones, which have less space to show ads and carry lower advertising rates.

What is clear is that Google continues to be able to refine its selection and presentation of ads in such a manner that is effective with users and ahead of competitors such as Facebook.

Google’s senior vice president of advertising, Susan Wojcicki said on the call that “We’re serious about providing more intelligent results,” and “We’re moving beyond a search engine that just matches strings of words to one that understands people, the world, the way people do.”

Looking at the monthly chart below we can see a very large wedge formation that has been in the making for almost 4 years now with the shares making successively higher highs but the $620 – $650 level proving tough to crack. The stock is not overbought on any measure and we wouldn’t be surprised to see the shares break through $650 sometime soon. For those readers with access the US options, in particular the LEAPS (Long Term Equity Appreciation Securities) then a stab at the Jan 2014 $600 Calls priced around $100 look good value, particularly with volatility being so low (and so making these options relatively cheap). On a blow out quarter Goog shares have been known to move 10-15% and so a $60 premium on these options for almost 18 months of time and the chart in your favour seems good value to us.

Goog monthly chart

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