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October 16, 2011
Google Still Looking Good
Google (GOOG) reported better than expected third quarter earnings of $9.72. Consensus was $8.74. Revenue growth of 33% slightly exceeded consensus estimates. The EPS beat was helped by other income, foreign exchange, and a lower than expected tax rate but this quarter revealed again that GOOG's core organic growth is not slowing down. Given the low P-E of 1 times 2012 earnings excluding over $130 in cash, the growth rate is what matters. This marks the fourth consecutive quarter of accelerating growth for GOOG. The stock is too cheap, even after the big run into earnings and 7% rise after the report. A target over $700 is easily achievable if the economy and market hold together and GOOG tracks to current 2012 estimates.
Also encouraging was stable sequential margins. GOOG is tightening its expense growth and it appears that margins may have bottomed in the second quarter. Margin expansion is the big missing piece for GOOG shares. The company continues to invest heavily in mobile, display, Chrome OS, and the Chrome browser. Management commentary indicates that these investments are paying off on the top line. At the same time, products are being dropped so the focus of the heavy investment is on areas that can make a difference.
Closing of the Motorola Mobility (MMI) will dramatically impact financial results in 2012 due the large revenue it brings. GOOG needs to further improve its financial reporting and transparency so core growth in search, mobile, and display is apparent. GOOG also faces tougher comparisons beginning next quarter which could limit reported growth.
Despite these issues, investors should stay focused on top line growth ex MMI and margins. The last few quarters these issues have been in the right direction. I think it is time to believe that GOOG can sustain 20% growth at stable margins. If so, the shares have a lot of upside. I am a believer.
Disclosure: GOOG 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 investment advisor. GOOG is a net long position in the Entermedia Funds, long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia's investment management company, and has personal monies invested in the Funds.
Posted by Steve Birenberg at October 16, 2011 05:43 PM in GOOG
WHAT DID YOU THINK OF MILLLICOM'S CONFERENCE CALL?
DO YOU STILL THINK WE ARE IN A TRADING RANGE FOR THE OVERALL MARKET?
I thought Millicom's earnings and call were solid. EPS, revenue, and subscribers all were a little below consensus but given concerns going into the quarter I think the fact the numbers were not worse is a relief. Guidance was maintained which is encouraging and suggests 4Q is off to a good start. the $3 dividend is nice and in line with my expectations. I think the stock is a worth $95-$1115 so it is in the middle of the range. Independent of a takeover, the key to breaking out is whether growth accelerates or decelerates. I am not sure about that.
I think the market remains in a trading range but there is a decent chance we try to breakout to the upside in the near future. I'd still be playing it on the conservative side, however. Keep reserves above average and be quick to take profits and cut losses on trades.
Posted by: Steve at October 18, 2011 09:40 AM