Google (GOOG/GOOGL) reported better than expected 2Q16 results.  Revenues grew 2% on a currency neutral basis, the best in four years, and several hundred basis points ahead of Wall Street expectations.  EPS also surprised to the upside at $8.42 against expectations for $8.09 as tighter cost controls continue to be evident since the arrival of the CFO about a year ago.  Mobile now represents over half of revenue and it appears that the shift to mobile maybe poised to accelerate financial results much as it has for Facebook over the past year.  This should prove satisfying to investors and sets up GOOG/GOOGL to play some catch up after the shares were down a few percent so far this year heading into the earnings print.

Mobile has had a mixed impact on Google’s financials so far.  In the core search business, mobile has kept searches or paid clicks growing at a very high rate.  However, pricing for mobile search ads has been well below desktop liming the upside from growth in searches.  It appears that mobile pricing may be improving.  If so, Google should be able to sustain its overall growth rate even as comparisons stiffen as benefits form adding a fourth paid search link to mobile searches is lapped.

Google is not sitting still and is always tweaking its search business to sustain growth.  There has been some movement to add new types of text ads or additional ad links in certain verticals recently.  These changes are likely to help sustain momentum beyond improved mobile ad pricing.

Besides tougher comps, other investor worries at Google include higher traffic acquisition costs and continued losses at its Other Bets.  We like it when good stocks face some concerns as it keeps in place the proverbial wall of worry that leaves expectations in check.  In turn, that keeps the stock price at a reasonable valuation.

Strong fundamentals and the wall of worry are in place for GOOG/GOOGL and the stock remains very attractive.  2Q16 results increase confidence that 2017 EPS can grow nearly 20% to over $40.00.  GOOG/GOOGL today trades at only 20 times earnings giving no benefit to nearly $100 in cash on the balance sheet net of debt.  The company just completed a meaningful share buyback and additional return of cash to shareholders should be announced later this year.  When companies spend cash to benefit shareholders at least some credit for balance sheet cash should be given.  We think the shares can reach $850 this year based on 20 times next year’s earnings plus credit for half the cash.  If growth holds in 2017 as we expect, the stock can move even higher by this time next year.  We are sticking with GOOG/GOOGL for Northlake clients.

GOOG and GOOGL are 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 and GOOGL are net long positions 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.