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October 15, 2010
Google 3Q Earnings Revive Growth Thesis
I was expecting good 3Q10 earnings from Google but I thought it would be built on better cost controls. 2Q10 results that led to a big slide in the shares saw higher investment spending overwhelm a small top line beat. Ahead of the 3Q numbers, I expected another quarter of revenue strength but figured management had gotten the message and would keep a lid on expense growth.
Google did produce a strong quarter and significant positive surprise but it was built mostly on better than expected revenue. Search came in a little higher than expected, providing relief against the onslaught from Bing and competitive worries in mobile and from apps. Display and mobile both exceeded expectations, growing 30% and 60%, respectively. More importantly to investors, management provided specific revenue run rates and optimistic commentary for these emerging businesses. Display and mobile now make up about 15% of Google's revenue and their fast growth should represent more than 25% of future growth. With these businesses now sized and contributing, higher expenses to support their growth are deemed acceptable by Wall Street.
The bottom line is that Google's numbers revived the growth story. In addition, Google reminded investors it can still produce upside surprises. The stock is not expensive for a company still growing more than 20% annually. Earnings in 2011 could approach $35 and 2012 should be over $40. Back out the massive cash reserves on the balance sheet and the stock trades around 15 times forward earnings. This is a reasonable, arguably compelling, valuation for a fast growing leader in one of a few global growth industries, especially with Google shares still down 5% in 2010 after the 9% pop off today.
Disclosure: Google is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, an SEC registered, long only investment advisor. Google is a new long position in the Entermedia Funds. Steve Birenberg is co-portfolio manager of the Funds, owns a stake in Entermedia's investment management company, and has personal monies invested in the Funds.
Posted by Steve Birenberg at October 15, 2010 08:55 AM in GOOG
.1what do you think of bidu
2.is apple still a buy-do you think its likely to sell off today after hours as per its norm?
3.micc sold off today after an analyst lowered his rating on the stock based on price;however,another famous analyst feels its a takeover candidate and should sell for large premium;stock price dropped $4 today so far; do you think its now a buy?
I don't follow BIDU. China seems like a good place to invest and BIDU is a leader but I have no sense for timing.
Apple is certainly discounting a lot of good news so a sell reaction to earnings is quite possible. But I think the bigger picture remains very favorable. Apple is likely to earn over $20 a share in 2011. Back out what will be over $60 a share in cash and the stock is just 12-13 times earnings. I guess I am saying is that I don't care how the stock reacts to earnings unless my confidence in the $20 EPS forecast in 2011 weakens.
At this point, I want to see what MICC says when they report tomorrow. Clearly, they need a "beat and raise" quarter to reignite bullish sentiment. I agree there is value as a takeover candidate which limits downside. The downgrade is based on competitive worries in a few markets. That could be a problem for the near-term. I'm definitely not selling and will wait to hear form the company tomorrow to decide what price I'd be willing to buy more. I'd think around $90 if nothing changes.
Posted by: Steve at October 18, 2010 11:39 AM