Sunday, July 19, 2015

Google Q2 Earnings

Google Q2 Update

For a long time Google (GOOG) has been confined to trade range in the mid to lower $500 range but following Friday's earnings release - Google managed post gains in historic proportions. Beginning the quarter at $542 and ending the quarter at $520, the company closed on July 17th after reporting earnings at $672. The tech giant gained $65 billion in market cap in one trading day, the biggest single day gain posted by a company ever.

Google posted gains across the board in revenue and income measures, an attribute that is not new for the company. Revenue was basically in line with consensus at $17.7 billion reflecting 11% growth with Non-GAAP operating profit accounting for 34% of revenue at $6 billion. Bottom line GAAP net income was $3.9 billion which was up 17% YoY leading to an EPS for Class - C shares to reach $6.99, blowing away consensus predictions of $6.70.

The surge in value comes after Google's new CFO, Ruth Porat who was previously the CFO of Morgan Stanley, joined Google in May. Under her oversight, the company has displayed better cost management and a refocus in revenue driving activities, which for many investors was a cause of concern posed by Google. The biggest single contributor to Google's revenue is Google Sites which rose in revenue 13% compared to this time last year translating to $12.4 billion. Porat stressing the shift in search revenue towards the mobile market can only be viewed as a positive scenario. With PC sales decreasing and growing consumer demand for mobile devices, Google is in a prime position to take advantage of an untapped mobile ad market. While keeping usability a priority, GOOG is up scaling the mobile advertisement business and affirming itself as the dominant player for that market. Youtube mobile users also grew which translates to a growth in Youtube's "true view ad" revenue. Overall Youtube saw an impressive 60% increase in user watch time compared to last year. In addition to a revamped focus in revenue building programs, Porat has enacted expense control policies to mitigate the expenses of Google's various ventures to maintain its status as an innovative tech company. The trend can be quantified in the fact that Non-GAAP OpEx reached $5.4 billion this quarter which accounted for 30% of revenue as well as an 11% increase YoY. What is interesting is that in Porat's first quarter as CFO, Non-GAAP OpEx decreased 1% sequentially. Obviously Porat's influence has impacted the financial statements of Google and has investors excited for the company's performance in the future.

With Porat's leadership and Google's status and capabilities, the price target has obviously been raised for Google. However, compared to many analysts I am currently a bit conservative on just how high the PT should be lifted. Granted Google's performance was monumental, it will be interesting to see if the company's cost cutting policies and increased focus in revenue drivers will be sustained. Keeping that in mind I am a bit more conservative with my price target lies in the $730-$750 range. The model needs revisiting for precise pricing but based on the fact that Google gained so much value in a single day, I am a bit apprehensive with Google's potential upside since the stock has not reached its current value in a steady fashion but rather as a result of beating expectations. With the bar set higher than ever for Google, it is going to be tough to add value to an already relatively expensive stock.

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