We all know Google (GOOG) is the disaster du jour. After a mistake caused a premature release of what looks like a very bad quarter, the stock tanked a full 10%. To which I say, yawn. Let the nervous nellies out, and, when things settle down, buy more.
Here's why. The miss was caused by two factors -- a 15% reduction in the price Google got per click from ads, and Motorola. I have warned about Motorola's impact on the numbers before, and the layoffs announced recently should have confirmed for investors that the short-run outlook there is bad. By dumping the costs quickly, Google turned a Motorola break-even into a net loss. I don't know about you, but I prefer it when companies get their bad news out of the way, rather than letting it fester on the balance sheet, poisoning the future.
Still, there are two good reasons to remain confident in the stock.
The first is the Android ecosystem, which includes the Chrome line of desktops. For this Christmas Samsung expects to deliver a laptop Chromebook priced at just $249. It looks like a Macbook Pro, but costs about one-fourth as much. And it comes with 100 GB of online storage.
The second is simply growth, especially in the mobile space, which Google is positioned to capture at a lower cost/user than anyone, including Apple. Global smartphone use is now expected to double in the next three years. Even if those clicks generate less cash per click, that's a lot more clicks, meaning there's a lot more money to be made.
Recently, Google gave Steven Levy of Wired a tour of some of its data centers, and he came back with something that looks, and reads, like a Life Magazine article from the 1930s. There was a reason for this. Google wants to emphasize that it has the infrastructure to compete with any other cloud provider on cost of clicks at scale. It was a shot across the bow at Amazon (AMZN), whose EC2 cloud has been the public cloud leader.
Google is going after market share. When a company is going after market share aggressively against a competitor who doesn't mind losing money to keep share it's amazing that it can still bring in net income of $9.03 for a single quarter, as it has reportedly done. Take even that figure across four quarters and, at its most recent price of about $687, you're still looking at a forward PE of about 19. Given its growth prospects, that's fair value, and executing on its current path should mean even better results going forward.
Wait for things to shake out, then buy.
Disclosure: I am long GOOG.