Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

After the Earnings: Why it is time to buy Google (Update 1)

|Includes:Alphabet Inc. (GOOG)
Google reported earnings after the bell on Thursday. The company disappointed Wall Street with numbers of $6.45 a share versus the $6.51 consensus estimates. The main cause of the earnings miss was that Google had the audacity to add almost 1200 highly skill professionals to its workforce. Even though revenue posted  better than expected numbers of $6.82 Billion for the quarter, the stock sold off heavily in pre-market action and got progressively worse along with the general equity selloff. It ended down seven percent in Friday’s market rout.
Despite the earning’s miss, there were several positives in Google’s second quarter earnings report. Paid clicks were up 15% from the previous year. Revenue growth was also up 24% year over year. In addition, the company had several positive developments outside of its core internet search business. Customers are activating 160,000 Android mobile devices a day, up from 65,000 last quarter. Although this does not add anything to revenue in the short term, it does assist Google’s effort to expand its leadership in search to the mobile market. The company was also able to negotiate a face saving way to remain in China as the Chinese government renewed their license. If nothing else, this will get this very public spat off the front pages and allow its company management to focus on more important items.
I believe the market overreacted to this earnings announcement and the selloff might present a buying opportunity for intrepid investors. Google is a remarkably strong company that is building on its core strengths while expanding its reach into other related areas. First and foremost, despite the more than 25% retrenchment in its stock price this year; Google remains the undisputed leader in worldwide search. In the latest May Comscore rankings, Google had a 64.3% market share of all searches done worldwide. Its dominance in this arena allows it collect more than 2.5 times more revenue per unique visitor than its closest competitor, Yahoo. Internet search makes up close to 97% of Google’s revenue and the migration of advertising from traditional channels to online is still in its early stages. In addition, 53% of Google’s revenues come from overseas which provides a good buffer should the U.S. Economy slow down in the second half of the year.
Google is aggressively pursuing a strategy to be the leader in the fast growing mobile search market. The recent purchase of Admob and the rollout of Android are two critical parts of this effort. The mobile search market is expected to grow from 9% of all searches this year to 15-20% of all searches by 2012. Google’s leading position in internet search and its early strategic investments in video, map, mobile and click to call search technology make it the odds on favorite to be the market leader in mobile search; which will eventually provide a very important source of revenue to the company outside its core internet search offerings.
The company is also making progress outside of search. Its purchase of YouTube for $1.65 billion in stock in late 2006 is paying dividends. YouTube now has 145 million unique viewers and Susquehanna analyst Marianne Wolk estimates Google sold $500 million of YouTube ads in 2009 and expects it to surpass $1 billon by 2011. Although there was some disappointment that Google did not say YouTube was profitable yet as was hoped for during this latest earnings call, the company is building a market leader among Video websites. YouTube’s market share of 43.1% is almost 13 times more than its closest competitor, Hulu. In addition, its Google Maps now ranks as the top U.S. travel website and Chrome is now a solid and growing number three among web browsers.
Google’s valuation looks quite compelling at its recent price of around $460. Stripping out the net $95/share in cash, Google is selling at approximately 13 times the roughly $28/share it is projected to earn this year. Given its valuation and revenue growth this year of over 20% and projected revenue and earnings growth next year of over 15%; this stock could easily appeal to both growth and value investors. It does not take a computer algorithm to figure out that Google is worth a very hard look at these levels as a long term investment.

Disclosure: Long GOOG
Stocks: GOOG