On January 29, the search engine giant Google (GOOG, Financial) fell off Street expectations for the final quarter of 2014, but the numbers were optimistic to keep the investors interested in the stock. While the search and advertising giant continued to report lower cost-per-click earnings, the number of total clicks on an annualized basis saw a phenomenal growth in 2014. The Mountain View company continues to invest aggressively, raising a question whether it’s a valuable stock to hold for the long-term investors. Let’s quickly get into the highlights for the quarter and the management outlook for the coming fiscal year to answer this question in detail.
The quarter highlights
For the final quarter of 2014, the company posted revenue of $18.10 billion and net income came at $4.40 billion. The improvement in revenue was majorly attributed to the sale of the Motorola Mobile business which aided in generating a one-time gain of $740 million. In the recent earnings call, CFO Patrick Pichette stated that its revenue for the year totaled $66 billion which was up 19% year-on-year. However, he also stated that the revenue was affected by the strengthening dollar which depressed the quarter earnings by around $468 million from what it would have been if the currency rates remained constant and unchanged from a year earlier.
Hence the company missed the analysts’ estimates as it reported about $14.48 billion in revenue after deducting the traffic acquisition costs (TAC), while Wall Street had prdicted about $14.82 billion in revenue after excluding TAC.
Advertising remains the strong point for Google though the net income being generated through this line of business has been declining in recent years. Even in this quarter, advertising revenue represented about 89% of its total revenue and the CFO reiterated that other revenue rose to $2 billion for the quarter, reflecting the brisk growth in Google’s Play Store.
Google is a cash rich company and is currently seated on a cash pile of around $64 billion – this cash is invested by the company and not still used to pay dividends to investors.
Management tone is firm and reassuring
The bone of contention with many shareholders has been the $64 billion cash stash, and as a company Google is completely entitled to distribute cash among its shareholders in the form of dividends or massive share buyback program. However, some investors are upset about Google using the money instead for some other major activities like acquisitions or in meeting intense research and developmental expenses.
Pichette shared during the earnings presentation, “From an investment perspective, we’ll continue to seek a healthy balance between growth and discipline and the willingness to throttle back when we reach the limits of what we can manageably absorb…” Even its CEO believes that Google loves to take big bets on ambitious ideas that he termed as “moonshots” in an effort to open future moneymaking opportunities and such projects are being developed or executed by the R&D team.
In fact, the investors’ disappointment in the quarter results missing analysts’ estimates nearly got wiped off when the CFO assured investors that Google intends to spend its funds in a “prudent manner,” and he left open the opportunity of funneling back the cash in hand to the interested shareholders at the right juncture.
Such detailed remarks given by the management reversed the initial sell-off of the stock and helped it to bounce back and post a 2% gain of $10.47 to $523.70 by the end of trading on the same day of the earnings release.
Analysts remain optimistic on the stock movement
In a report dated January 29, Nomura analysts bumped up the price target for Google from $600 to $625 a share citing positivity seen in Google’s Sites revenue which grew 18% during the quarter. They have further noted that the shortfall in revenue in the Google’s Other segment was due to issues linked with the inventory of Nexus 6. Also as speculation on starting a share repurchase program looks ripe at this juncture, Nomura analyst has raised his opinion on the stock.
Final word
The best part about Google is that it remains cash rich even though it might have missed some fairly inflated estimates recently. It is still crafting innovations and growing ceaselessly, which makes for enough a reason to invest and rule out the misses. Moreover, the management also has taken an optimistic stand on the upcoming future of the stock and the CFO has assured a lot to the shareholders. Hence, Google remains a valuable stock to hold on at this juncture.
