Google reported another good quarter.  FX-neutral revenue grew 24%, better than expectations of 20%.  Given the concern that Google was lapping a tough comparison to last year when the company first added another ad to searches, the sustained growth rate is the biggest takeaway from the quarter.  Growth was driven by 33% growth in paid clicks, the highest rate since 2012.  It is clear that Google has managed the transition to mobile and that mobile search is every bit as a much a driver as desktop search was previously.

Another important takeaway is that the company continues to show much improved discipline on costs and capital spending, especially at what are now called the Other Bets.  Corporate operating margins surprised to the upside and capital spending was a bit below expectations.  Each of these factors has been evident over the last year as greater management discipline, led by CFO Ruth Porat, appears to have taken hold throughout the company.  The same goes for capital allocation, where the company announced a new $7 billion stock buyback.  This buyback and the previous first ever buyback are modest relative to the company’s market cap and to Apple’s massive buybacks but they send a clear message to investors that reinforces Google’s new discipline.

Investor confidence in Google’s growth profile and focus on profits and shareholder return is important because management made clear that they would still invest aggressively where warranted even if it pressured margins in the short-term.  Higher spending in support of the new Pixel phone this coming holiday season is one example.

The conference call was dominated by questions about Google’s efforts in cloud services.  Google trails Amazon and Microsoft in cloud but it is clearly trying hard to get much bigger quickly.  Financial and management resources are being dedicated to the business.  Management called out cloud as the single fastest growing business in core Google during the quarter.  If cloud can ramp quickly, it provides another support to the valuation of Google shares.

Northlake remains bullish on Google.  The shares closed last night at 23 times 2016 estimated earnings per share.  Should Google sustain recent growth rates around 20% on an FX neutral basis with continued discipline on expenses and capital spending, we believe the P-E multiple can hold.  23 times 2017 estimated earnings of $41 equates to our new Google target of $943, up 18%.    That is an excellent return target for one of the largest companies in the world by market cap.

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.