Google (GOOG/GOOGL) reported slightly disappointing revenue and lower than expected EPS against elevated street expectations for 1Q16.  The shares are trading down by -5-6% this morning.  The decline in the stock is understandable but Northlake does not feel there is much to worry about in terms of the key trends that drive Google’s business.  We expect the shares to trade in a range of $700-800 in a stable market with substantial upside once investor confidence returns.

Revenue came in a few hundred million dollars below expectations with most of the miss coming from the Google Networks.  Google has culled its network hoping to drive as many search as possible directly to its website and apps.  A unique drag this quarter that analysts may have missed is the loss of the AOL search business.  This was well known and an argument could be made that it accounted for most to the top line miss.  Overall revenue still grew at 20% despite the network headwinds.  Paid clicks grew a very healthy 29%, ahead of consensus.  This is the key measure of the health of the business and strongly suggests that the shift to mobile is helping rather than hurting Google’s business.  Operating margins expanded slightly and performed better than Wall Street expectations.  This is also an important bullish development as the company continues to tighten its expense growth since hiring a new CFO and establishing a more profit focused corporate culture last summer.  EPS missed estimates by about 6% but with operating income in line with expectations.  The entire miss came from non-operating items like foreign currency hedging.

Wall Street has had a particularly intense reactionary focus of late with trend following and momentum dominant.  This is adding a lot of pressure to Google shares today that is likely to linger.  However, we think the core business is healthy with 20% organic growth.  Along with a more shareholder focused corporate culture, the shares should reassert their uptrend.  Looking out to the end of the year and valuing the company on 2017 earnings estimates we see upside to $840 based on a P-E of 22X.

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.