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April 16, 2010

Google Misses. Sort of.

Even before the Goldman Sachs related market meltdown, Google shares were down 5% following the company's 1Q10 earnings report after the close on Thursday. Most all of the many headline numbers regularly provided by Google met or slightly exceeded expectations. However, the upside was minor and there were a few blemishes. The upside was mainly a return to growth in paid searches. The downside was the price Google earned per search was a bit less than expected. Another blemish was that international growth ex the UK lagged. But since revenues came in slightly better than expected that means the US search business was above expectations.

I think Goldman Sachs' analyst nails it when he notes given a trade-off between more searches or revenue per search, he would take more searches. The implication is that the search business is still quite healthy despite the economy and challenges from mobile computing and the rise of Apps. The analyst also notes to be drawn from this mix is that US search growth accelerated big time. Given a choice between US and international search, he would take US as this market is supposed to be closer to maturity. Thus, a takeaway could be there is more upside abroad ahead than previously thought if the mature market is still growing at this rate.

I buy those arguments, which strongly suggest Google is fine for the intermediate to the long-term. The short-term is trickier as expectations were high and sentiment toward Google is mixed to the challenges on the business and regulatory fronts. Since Northlake's approach is to invest for months and years ahead, I will be holding the shares as I expect the long-term story will re-emerge later this year providing upside to $700. Based on 20 times 2011 estimates earnings plus projected cash on hand (currently over $85 and growing each quarter).

Disclosure: Google is widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg's personal accounts. Google is a long position in the Entermedia Funds. Steve Birenberg co-manages the Funds, owns a portion of the Funds' management company, and has personal monies invested in the funds.

Posted by Steve Birenberg at April 16, 2010 02:35 PM in GOOG