Google (GOOG) posted another solid first quarter after the close Thursday, with revenues growing 24% from the same period a year ago and adjusted earnings per share coming in at $10.08 — ahead of consensus estimates. Our thesis on Google (click here) remains unchanged, and we think shares continue to be fairly valued at current levels. We’d grow more interested in adding Google to our Best Ideas portfolio if it registered a higher score on our Valuentum Buying Index. At this time, we’re also quite comfortable with our current technology exposure in the portfolio: Apple (AAPL), Intel (INTC), and eBay (EBAY).
Aggregate paid-clicks were up a whopping 39% compared to the first quarter of 2011 (and up 7% sequentially), suggesting Google continues to dominate online advertising. However, the average cost-per-click fell about 12% on a year-over year basis (and 6% sequentially), though the declines were less steep than last year. Additionally, Google estimates that its browser, Chrome, currently has around 200 million users, which we think will help aid the company in maintaining search market share. We also think success with its Chrome platform could lead to better performance within the mobile end market, if users start to prefer the Google interface.
Other segments are performing well, too. YouTube continues to grow quickly according to CEO Sergey Brin. Brin also stressed that it continues to make improvements to Google+ and expects its social platform to become a greater part of Google. Though we don’t deny the number of users Google+ has, we doubt its long-term viability as a robust social network (given the significant first-mover advantage Facebook has and the relative size of its network) – see our thesis on Google here for more information.
However, we think Brin’s focus on Google+ during the conference call shows that the firm believes Facebook (FB) is the biggest threat to its overall search business. Rumors are also flying that Microsoft (MSFT) may sell Bing to Facebook in exchange for a greater ownership stake in the social networking behemoth. Such a move would create some serious competitive pressures in search over the long haul, particularly given Facebook’s potential $100 billion market capitalization and its willingness to throw money around (it just purchased Instagram for a cool $1 billion – not million, billion).
On the conference call, we were disappointed to hear very little mention of Android, which we think is critical for Google’s mobile search and advertising dominance. We think Android will struggle against Apple, and that it remains the weaker player in terms of consumer perception and satisfaction.
The stock split that stole the headlines…
Though we believe evaluating a company’s future fundamentals and their impact on its intrinsic valuation are the main considerations in assessing quarterly performance, investors shouldn’t totally dismiss the company’s effective 2 for 1 stock split. In this split, existing holders will be given 1 share of Class C stock with no voting rights for every share they currently hold. This will allow the founders Larry Page and Sergey Brin, along with executive chairman Eric Schmidt, to maintain majority voting control while divesting stock. The divestment is a planned selling (already underway), so we don’t think investors should be worried in that respect.
Yet, it’s always troubling when insiders make defensive moves to keep total control of the company. Similar strategies have allowed the Ford family, for instance, to maintain control of Ford Motor (F) while only owning a small float of the common stock. CEO Mark Zuckerberg of Facebook is also creating a structure that will allow him to yield disproportionate power over the company regardless of how much stock he sells. While this might not fly in a more vanilla business, we think some investors—rightly or wrongly–tend to put as much weight in innovative founders as they do the operations of the company, thus some investors are betting that Brin and Page will continue to be visionaries in the same mold as Steve Jobs. That said, we tend to like management teams that have a lot of skin in the game, all else equal.
We think the most interesting aspect of the split is that it will be used to pay out stock-based compensation, which Google forecasts at $2 billion in 2012, and on a go-forward basis. The new share class may also be used to engage in acquisitions, which was also very interesting to us, considering the company already has over $40 billion in cash. We think Google may be aware of its ongoing weakness in social (despite Google+), and since Facebook is already too big (and Zuckerberg’s baby), we think Google may try in coming periods to acquire and integrate Twitter, which could cost them in the neighborhood of $30 to $50 billion, by some estimates. We continue to watch this interesting story evolve.