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February 03, 2014

Another Good Quarter Builds Bull Case for Google

Google (GOOG) reported another good quarter. Please note I am defining “good” as satisfactory to investors. GOOG went through a roughly six quarter stretch in 2012 and early 2013 where despite showing sustained 20% plus growth, investors were concerned. These last two quarters have addressed the concerns and GOOG shares have moved up sharply to all-time highs. Northlake’s investment thesis on GOOG is that the shares offered a lot of value given steady 20% growth. The divestiture of Motorola’s handset business, two quarters accelerating growth in paid clicks (searches), and better expense management leave the bullish investment thesis very much intact. I think the shares can trade to at least $1,300 this year based on 20X 2015 earnings estimates plus some benefit for the $150 cash balance. There are very few large cap stocks with substantial revenue bases that can grow 20% a year. GOOG should continue to be rewarded for its unique growth and value profile.

In the latest quarter, GOOG core revenues grew 22% and margins showed stability. Core results exclude Motorola. GOOG appears to be handling the transition the mobile search well, while also getting more than its share of display ads through YouTube. Paid clicks grew 31%. If you believe as I do that mobile ad pricing will eventually improve then paid click growth is the single most important indicator for GOOG’s future financial results. Mobile searches today bring in less revenue and the mix shift toward mobile means GOOG’s realized ad prices are still falling but as long as GOOG remains dominant search market share and mobile growth continues, when mobile pricing improves the company will be able to sustain its growth profile.

The last two quarters seem to be convincing investors that the mobile transition is going to be good for GOOG without a major hiccup as the mix shifts from desktop to mobile. With Motorola no longer a worry, the bull case for sustained double digit growth is even stronger. GOOG represents an excellent core holding for patient investors…and that includes Northlake Capital Management.

GOOG is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake regulatory filings can be found at www.sec.gov. GOOG is a net long position in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, communications, leisure, and related technologies. Steve Birenberg is the portfolio manager of Entermedia, has personal monies invested in the funds, and controls Entermedia’s General Partners.

Posted by Steve Birenberg at February 3, 2014 10:25 AM in GOOG