Google: Don't Worry

| About: Alphabet Inc. (GOOG)


Google dropped 6% following an earnings report that saw it miss both revenue and earnings estimates.

Forex losses came in larger than expected. Had these met forecasts, Google's results would have been in line with expectations.

The advertising business remains strong. Aggregate paid clicks were up 29%.

The "Other Bets" category posted significant losses, but these ventures aren't expected to pay off until further down the road.

Google (NASDAQ:GOOG) (NASDAQ:GOOGL) reported earnings last week, delivering what was on a high level could be construed as a disappointing miss.

The market may be treating this like a miss, but to me it feels like it's a "good miss." Reading through the earnings report and the financials, I think there's still a lot to like here and the 6% drop in Google stock represents an ideal "buy on the dip" opportunity.

Here are five things that I like from Google's Q1 earnings:

Google is investing in areas that will pay dividends down the road.

One of the things that likely concerned investors was the numbers for the "Other Bets" category - essentially one of Google's long-term research and development arms that focuses on more speculative business ventures. This area doubled revenue to $166M compared to the year-ago quarter but also increased losses to more than $800M.

That's a big revenue-to-income disparity but keep in mind that this is where Google is investing for future expansion and growth. It includes businesses like Nest, Google Fiber and self-driving cars. While not all of these ventures will pan out, some will and these will be the future of Google. The company needs to keep investing in these areas.

Writedowns from some of these ventures may account for part of the losses this quarter.

The advertising business is strong.

Aggregate cost-per-click revenue was down 9% year-over-year, but Google's advertising business as a whole remains strong. Aggregate paid clicks were 29% year-over-year and 38% on Google websites. Google segment revenues were up 17% as a whole including 20% growth in Google websites.

For all the talk of the demise of the traditional advertising model, Google manages to keep delivering double-digit quarterly year-over-year growth.

Optimized mobile monetization is still a year or two away.

The ability of companies to embrace the move to mobile and be able to effectively run campaigns on mobile devices has a trend that is still slowly developing. Facebook (NASDAQ:FB) was a shining example of that a couple years ago as concerns persisted relating to how the company could effectively monetize the mobile experience. It's safe to say they've now figured out.

Other companies will still be working their way through these growing pains over the next couple of years as they begin figuring out and implementing these strategies. But mobile will undoubtedly be a source of future revenue growth for Google over this time.

Forex losses played a big part in the revenue miss.

Foreign exchange losses came in larger than expected in Q1 (revenues of $20.26B vs. $20.85B in constant currency). If the $600M difference comes in closer to expectations then Google delivers largely an in-line quarter.

The dollar has begun steadying itself lately and this trend could help eliminate some of the uncertainty related to forex in future quarters.

Google delivered record free cash flow in Q1.

The company reported free cash flow of $5.2B in the quarter - easily the best quarterly number that Google has delivered and an over 40% improvement compared to the same quarter a year ago.

Overall, this is still a company in good shape. Friday's 6% haircut in the stock price should be viewed as a good opportunity to pick up some shares on sale.

Disclosure: I am/we are long GOOG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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