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April 13, 2012

Google Looks Fine but Street Votes No

Despite Google (GOOG) stock getting a drubbing today I am more comfortable with the shares than I was before the earnings report last night. The report was largely in line. Revenues were as expected/ EPS upside was from tax rate and good expense control that juiced margins. I think expenses are a little lumpy at Google so I would not say all is clear on margins but this is still good news. The tax rate also fluctuates so I would not call this a low quality beat either. The volume of searches was much better than expected but the price paid by an advertiser per clicked search fell 12%. This reignited the debate over the health of the underlying business. The shift to mobile computing via smartphones and tablets is driving search volume to mobile where advertising prices are currently lower.

Despite today's stock action, I think the Cost Per Click debate moved in favor of the bulls this quarter. The worry is that mobile clicks will never see rising prices. I think that is the result of weak mobile pricing elsewhere in internet display advertsing. I understand that but I think search has proved different on the desktop and will do the same in mobile. I come at this from a traditional media perspective and I think volume and price will follow eyeballs over time as long as search maintains a high ROI for advertisers (just like national TV does). I think that should be the case for mobile. I get the worry about competition for mobile search from apps and e-commerce sites but I think a similar bullish argument can be made that search is even more valuable in a mobile environment as consumers are even closer to point of purchase than on the desktop.

Bottom line. The quarter is good enough. This too shall pass. Google shares overdue for a catch up move to the market and will reach $750 in 2012.

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 Illinois-registered investment advisor. Filings can be found at www.SEC.gov. Google is a net long position in the Entermedia Funds. Steve is co-portfolio of Entermedia, a long/short equity hedge fund focused on media, entertainment, communications, and related technologies. Steve owns a stake in Entermedia's investment management company and has personal monies invested in the Funds.

Posted by Steve Birenberg at April 13, 2012 03:22 PM in GOOG