The expectation was that its fourth quarter net revenue, excluding fees shared with partner websites, would jump to $8.4 billion, growth of 32%. With that optimism, options traders have been purchasing Google calls — the right to buy Google’s stock at the fixed price to the certain time in the near future — much more than the puts — the right to sell the shares.
Schaeffer’s investment research says that investors have bought two calls for every put option as a new position on three U.S. options exchanges over the past 10 sessions. The company is known to report earnings a day before options expiration, set to be volatile after the earnings have been released. Kevin Pleines at Birinyi Associates said that the company has beaten earnings estimates 77% of the time since the second quarter of 2005.
As for me, the more people get excited, the more I become worried. Investors have been so bullish short term on Google that it drove share prices from $495 in October 2011 to nearly $670 in the beginning of January, delivering investors 35% gain in just three months.
On Thursday, my short-term worry became reality, when its quarterly results fell short of Wall Street’s high expectations due in large part to declining rates in search advertising. It underperformed on both revenue and earnings in the fourth quarter. With the expectation of $8.4 billion, the real net revenue delivered topped $8.13 billion. In response to the earning miss, the stock price has dropped 9% immediately.
However, it is very good growth compared to $6.37 billion a year earlier. Larry Page, Google's CEO, has commented on the overall strategy of Google. He mentioned that there are so many opportunities for Google today, but in order to make a real impact on the world, it needs to make hard choices about where to focus its efforts. The big bets made by Google include Android, Chrome, Gmail Display and YouTube. This has paid off handsomely with extraordinary velocity that one could dream about. There are 700,000 phones lit up every day and in total around 250 million Androids. In just two days over the holiday weekend, 3.7 million Androids were activated, and there were around 11 billion downloads from Android markets.
For financial performance in the quarter, the gross revenue grew 25% year over year to $10.6 billion, and 9% quarter over quarter. Patrick Pichette, Google's senior vice president and CFO, has noted that although currency rates had immaterial impact year over year, quarter-over-quarter they had a negative impact on revenue. If applying the last quarter’s exchange rates to fourth-quarter revenue, these would have been around $240 million higher.
In revenue drivers, Google's website revenue was up around 30% year on year to $7.3 billion, and Google's network revenue was up 15% to $2.9 billion year on year as well. The global paid click growth was strong, with 34% year over year and 17% quarter over quarter, while aggregate cost per click growth was down 8%. For the cash position, the operating cash flow was strong at $3.9 billion. The capex for the quarter was around $951 million relating to facilities and production equipment. That generated the free cash flow of around $3 billion. So yearly, Google has created $11.5 billion in free cash flow. At the current market capitalization of $207 billion, Google is valued at 18x free cash flow and only at 14.2x operating cash flow.