Google Q3 – Strength to strength

Good results mask corporate governance shortcomings.

• Google reported good Q3 results as market share inched up and its new ways of attracting advertisers gained traction.
• Q3 Revenues (ex-TAC) / EPS were $11.92bn / $10.74 beating estimates of $11.64bn and $10.36.
• Growth was particularly strong on Google properties which saw 22% YoY growth to $9.4bn.
• This was offset by flat advertising revenue from third party websites as the emphasis remains very much on driving traffic to its own sites.
• In addition, a great user experience is becoming critical for Google as it is only on its own sites and with its own experiences that Google really learns about its users.
• Long-term this is where the value really lies as that knowledge is very valuable to advertisers keen to target users with valuable information rather than be a pest.
• Other revenue was up 85% YoY and 18% QoQ to $1.2bn driven mostly by sales of apps and content from Google Play.
• Motorola recorded yet another thumping loss of around $200m on revenues of $1.2bn further underlining the fact that Moto X hardly seems to be flying off the shelves.
• To me, Motorola is nothing more than a very expensive insurance policy.
• When Samsung cuts off Google’s route for its apps to the mobile user, Google will still have Motorola with which to reach the market.
• This is essential for Google to keep its ecosystem going but at a purchase price of $6.3bn (assuming patents are worth $6bn) and $200m a quarter it is expensive insurance.
• Combine this with Google’s frivolous attitude to shareholder’s money and one has a governance nightmare.
• Unfortunately, shareholders have no say in the running of the company as control remains firmly in the hands of the founders despite the economic risk being largely taken by others.
• However, at the moment they do not seem to care as the core business is going very well and the shares are performing nicely.
• This was underlined by a mighty cash flow performance with $5.1bn coming in from operations and $2.8bn in free cash flow.
• The advertising business is now so large that Google needs to look to other areas in order to keep its momentum going.
• Here it is targeting hardware such as tablets and Chromebooks, content (Google Play) and enterprise.
• These are all moves in the right direction but at the moment, they remain very small in terms of their ability to have an impact on group revenues.
• Google remains an excellent company, leading in its field and not nearly as expensive as some of its racer, social networking oriented peers.
• That being said when I have deducted slower pace of growth and awful corporate governance I end up remaining pretty indifferent to owning the stock.