Search giant Google (click ticker for report: GOOG) reported another fantastic quarter Thursday afternoon. The firm exceeded expectations, earning $10.12 per share for its second quarter (up 16% year-over-year and $0.08 greater than the consensus estimate). Comparable revenue grew 21% for the second quarter to $10.9 billion, in-line with estimates. When Motorola Mobility is thrown into the mix, revenues grew 35% to $12.2 billion. Given the firm’s robust cash generating ability, we think shares are undervalued at current levels.
Though many boil Google down to the Android operating system, the firm remains the heavily-entrenched global leader in search and online advertising. In fact, paid clicks increased 42% year-over-year due to the impact of mobile advertising, but average cost-per-click fell 16% year-over-year. The firm has traditionally attributed the general decline in average cost-per-click to different search formats on new mobile devices, but quarter-over-quarter, cost-per-click stabilized, growing 1%.
Google-owned sites grew revenues 21% to $7.5 billion. Meanwhile, Google’s ad network revenue increased 20% year-over-year to a shade under $3 billion. Foreign exchange only negatively impacted the firm by $68 million, far less than IBM (click ticker for report: IBM) or Microsoft (click ticker for report: MSFT). Management also touched on several of the company’s businesses, articulating that AdMob has now been successfully integrated into AdWords and should drive advertising revenue for both iOS and Android. Since we think mobile computing still lags traditional PC computing in terms of return on investment, we are still waiting on a successful business model for mobile advertising. Until one is found, mobile ads could weigh on overall cost-per-click averages. On a more positive note, management believes YouTube has finally found a successful business model and leads the Internet in online video consumption. The user base has doubled year-over-year, and users now upload 72 hours of video every minute.
In spite of strong revenue growth, Motorola Mobility negatively impacted the bottom line, posting an operating loss of $38 million based on the firm’s calculation of earnings. As we recall, management asserted that Motorola would be accretive to earnings, but that doesn’t appear to be the case just yet. The firm noted the possibility of voice search integration that would likely compete against Apple’s Siri (click ticker for report: AAPL), but it did not announce any new material information regarding the segment. Another business segment the company is excited about, enterprise cloud computing software, now has over 5 million customers. Chief Business Officer Nikesh Arora took a clear shot at old technology, remarking:
“I hope you read this week about a company, who said competition was 50% more expensive than Google, and not as cool. That company is now a $200,000/year Google apps customer.”
However, Google may not realize that in the fast-paced world of technology, the $200 billion market cap company with over $45 billion in cash relates more to the old guard in tech than to the new guard. We think Google is more along the lines of Apple and Microsoft these days rather than Facebook (click ticker for report: FB), Twitter or Zynga (click ticker for report: ZNGA). Though its enterprise business is only a small part of the overall business mix, we think Google could eventually invest enough resources to really attack IBM, Microsoft and Oracle (click ticker for report: ORCL) on this front.
Nevertheless, the firm generated $3.5 billion in free cash flow, up from $2.6 billion in free cash flow during the same quarter in 2011. Google has more than $45 billion in cash on its pristine balance sheet and continues to grow revenues and earnings at a healthy clip. Though the firm scores a 6 on our Valuentum Buying Index, we think its large discount to the low end of our fair value range ($662-$1229) makes it a very compelling addition to one’s watch list. As we’ve written before, Google owns and develops several wild innovations that could end up positively altering the trajectory of the company, which we believe, is a great benefit of owning the stock. We are considering adding the name to our Best Ideas Newsletter portfolio on an improved technical and momentum assessment.