On Wednesday, Google announced weak fourth-quarter results that showed relatively disappointing earnings growth, declining cost per clicks (money paid to the firm for its ads) and slowing international revenue expansion. Though we’ll be re-evaluating our intermediate-term projections on the internet giant, we don’t expect to make a change to our fair value estimate at this time.
Google’s revenue advanced 25% in the fourth-quarter from the same period a year ago thanks to a 29% increase in ‘Google Sites Revenues’ and a 15% increase in ‘Google Network Revenues.’ Paid clicks jumped 34% in the fourth quarter from the same period a year ago, but average cost-per-click declined 8%. Though there was some currency impact and management blamed “format changes”, we had been looking for cost-per-click to increase in the quarter based on the strength we saw in holiday shopping. Needless to say, this cost-per-click decline, the first since 2009, was quite disappointing. And overshadowed by the disappointing advertising performance, Google+, its recently launched social-network, more than doubled its users in the past 3 months, to 90 million users, revealing that the momentum continues.
The internet giant’s non-GAAP operating income came in at just over $4 billion in the fourth quarter, representing a 19.5% increase from last year’s period. Its non-GAAP operating margin fell 2 percentage points to 38% from 40% in the year-ago quarter. Non-GAAP net income was $3.13 billion in the fourth quarter, but represented a less than 10% increase from the prior-year period. Google’s non-GAAP earnings per share of $9.50 in the quarter (versus $10.49 consensus estimates) reflect an increase of 8.6% from the fourth quarter of 2010–a disappointing pace to say the least. However, free cash flow continues to be robust, nearly reaching $3 billion during the quarter. The firm’s balance sheet also remains rock-solid, with cash on hand now approaching $45 billion.
Though we still like Google, the ad pricing declines in the period signal to us that the competitive environment is heating up—Facebook, etc.—and that Europe was certainly weaker during the last quarter of 2011, the latter a trend we expect to see prominently in coming reports.