Google (GOOG/GOOGL) shares responded favorably to its latest quarterly earnings report, rising over 3% on the first day of post-earnings trading.  The results were largely in line with Wall Street expectations, coming as a relief to many investors who feared worse due to difficult foreign exchange headwinds, slowing growth in search, and the shift in internet usage to mobile and apps from desktop.  The latest quarter does not really resolve the big questions that have kept GOOG shares from fully participating in the stocks market’s rally to new highs over the past year.  However, there was enough good news and fresh information to provide relief that should support the shares ahead of the next big event:  next quarter’s earnings and the arrival of the new Chief Financial Officer.

Adjusted for foreign currency, GOOG sustained its year over year revenue growth rate at 17%.  GOOG’s own websites grew faster at 21%.  Management has purposefully culled network sites, eliminating search volume but improving quality of the network.  This makes GOOG’s own websites performance the key to determining the health of the business.

Another important positive takeaway from the quarter was stable year over year operating margins.  A major part of the bear thesis on GOOG is that profit margins are continually falling because the company has little discipline and overspends on hopeless projects (Google Glass, self-driving cars, Google Fiber, Project Loon to name a few).  Furthermore, GOOG faces a problem in that no business it ever develops, including the very highly successful display advertising it already owns (YouTube and DoubleClick) will ever be as profitable as search.  For the second consecutive conference call, management addressed investor concerns about expense growth and in the latest quarter actually showed stable rather than declining margins.

GOOG provides the least amount of guidance of almost any company we follow but the company has opened up some over the past year.  The company seems to be showing some concern over the stagnating stock price by addressing many investor concerns.  In the most recent quarter, management discussed the massive success at YouTube for pre-roll video advertisements.  This disclosure also allowed the company to explain why cost per click, or the price GOOG receives for a click, remains under pressure and declining year-over year.  GOOG spun this to show the core search business is healthy with rising CPCs.  The added disclosure is good but it still leaves questions as to the impact on volume and pricing of searches as it relates to the shift to mobile.

In one other area of investor focus, management made limited comments when asked about the possibility of return of some of the company’s massive cash balance to shareholders through dividends or a share buyback.

What seems especially interesting to Northlake is that GOOG seems to be setting up for a critical earnings report in July, the first quarter where the new CFO will be on the conference call after she arrives in May.  Ruth Porat comes to GOOG form a very successful tenure at Morgan Stanley, where she had notable success with capital allocation and expense control.  She was also known to be very transparent about Morgan’s Stanley’s very complex business.  Ms. Porat’s expertise, including dealing with government regulators, seems to align perfectly with investor concerns and questions about GOOG.

GOOG shares remain quite reasonably valued compared to the company’s growth rate.  The latest quarter did not quell investor worries about sustaining the growth rate.  The results were good but did not contain the upside necessary to breakout the stock above recent highs.  We are willing to wait another quarter, especially with the CFO coming aboard.  It seems no coincidence that her skill set matches up so well with investor concerns about GOOG.  This provides a good setup for the type of news that will finally allow GOOG shares to catch up to the market’s rally.

GOOG/GOOGL 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’s regulatory filings can be found at www.sec.gov.  GOOG/GOOGL is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.