Google (GOOG/GOOGL) reported slightly better than expected 2Q15 earnings.  Revenue growth picked up slightly after a long string of decelerating growth quarters.  This proved reassuring to investors concerned about Google’s long-term growth rate amid a shift to mobile where app usage theoretically hurts traditional search which Google dominates.  Equally important for the stock, expense growth moderated significantly.  This was the first quarter where Google’s new CFO was aboard and expectations are high for stricter expense controls, greater transparency, and a return of cash to shareholders.  This marks the second consecutive quarter of improved expense control and the first quarter in several years where operating profit margins improved on a year over year basis.  Steady deterioration in profit margins as revenue growth slowed and expenses continued to rise (often on projects like that seemed to offer little near-term potential) has caused Google shares to lag other growth stocks over the past two years.

This quarter offered strong evidence that Google’s financial profile and growth rate are stabilizing at acceptably high levels.  Add in a strong debut by a very well-regard new CFO, and Google shares finally broke out.  We think the gains are sustainable and can be built on.  Furthermore, additional catalysts lie ahead including a possible share buyback or dividend and increased transparency around Google’s high growth businesses in mobile, ad serving technology, and YouTube.  Google shares could reach $800 with another quarter that affirms the improved trends just reported.  To get to $800, the stock would have to carry a P-E ratio in line with the NASDAQ index.  With earnings estimates rising modestly and improved investor sentiment around growth and transparency, further multiple expansion seems plausible.  Northlake intends to hold current positions in GOOG and GOOGL.

As an addendum, we think these comments from our review of Google’s 1Q15 are particularly relevant and explain the surge in GOOG and GOOGL shares leading into and following the 2Q15 report:

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 from 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.

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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.