Google Q3 14A – Law of large numbers

Slowing growth does not make the shares unattractive.

• Google reported slightly disappointing results as growth from its core advertising business in fixed Internet slowed a bit more quickly than expected.
• Q3 13A revenues (ex-TAC) and EPS were $13.2bn / $6.35 compared to consensus at $13.2bn / $6.54 and RFM at $13.0bn / $6.28.
• RFM has tended to be more cautious than consensus due to its view that growth will slow steadily over the next few years.
• However it should remain comfortably above 10% driven by mobile.
• Video, multi-screen and mobile continue to be the strongest growth areas with desktop and display lagging behind.
• Google is investing heavily in R&D as most of 3,000 recruits during the quarter were engineers.
• This has been partially offset by a fall in the GNA spend as a % sales which is good news as I have long held the opinion that Google grossly overspends on GNA.
• This has resulted in slightly lower operating margins which was compounded by a higher tax rate to give the EPS disappointment observed.
• There is bad news for Lenovo in these figures (reports Q2 14E on 7^th November) as losses at Motorola Mobility look to have ballooned again.
• Losses from discontinued operations increased to $185m compared to losses of just $68m in Q2.
• In the absence of the 10-Q filing, it is not possible to see exactly how much of the loss is coming from Motorola, but it is clear that profitability has nose-dived once again.
• This will increase pressure on Lenovo which is taking on the loss making division for $2bn and does not have the financial flexibility to endure ongoing losses.
• For Google, this is a rounding error that no one really notices and consequently it has no impact on my view on the company going forward.
• In this vein, the combination of mobile and video should keep the company growing nicely and I expect a solid end to 2014E.
• At 17.4x 2015E and 16.1x 2016E PER (close 16^th Oct), Google remains attractively valued and remains one of my top places to look when considering investments in the ecosystem.