This Tech Giant Continues to Beat Expectations
Jan 24th 2013 6:00PM
Updated May 15th 2013 6:35PM
Google continues to impress investors. On Tuesday, the company reported strong fourth-quarter earnings, driven by a 36% increase in year-over-year revenue growth. If that doesn't impress you, Team Mountain View reported an 8% sequential increase in revenue since the third quarter, driven primarily by an increase in aggregate paid click volume. We are living in an era where users have multiple screens connected to the Internet, which CEO Larry Page believes poses a tremendous business opportunity for Google in the years ahead.
Paid clicks grow
Since the fourth quarter of last year, the aggregate number of paid clicks grew by 24%, thanks largely in part to more connected screens. Sequentially, aggregate paid clicks rose by 9%, further enforcing the belief that the multiscreen premise remains intact. As an investor, it's important to see Google generating an increased volume of clicks for its business, but this is only one side of the story. Increased clicking does not matter if the clicks aren't worth as much.
Now going on five quarters, Google's cost-per-click, or CPC, continues to decline. Smartphones and tablets have less screen real estate than traditional PCs, giving Google fewer opportunities to make money. As a result, less advertising dollars are allocated to these platforms, driving CPC down with it. Aside from mobile, there's a host other factors affecting CPC rates, including currency fluctuations, emerging markets, the macro environment, google.com versus its ad network, and the overall quality of the ads. Combined, these factors drove CPC to fall 6% from the fourth quarter of 2011, but actually rose by 2% sequentially. Adjusting for currency fluctuations, CPC was down 4% year over year and up 1% sequentially.
The factors negatively affecting CPC appear to be stabilizing, especially when you consider that the 6% year-over-year drop in CPC is the lowest Google has seen in five quarters. If this were the case, it would be a very encouraging development for investors.
Traffic acquisition costs ease
Traffic acquisition costs, the portion of Google's revenue that's shared with its advertising partners, has been steadily on the rise over the last 12 quarters. There has been a growing fear that Google has to spend a larger percentage of its revenue to drive traffic through its domain, which would be problematic for its profit margins. Thankfully, TAC as a percentage of revenue backed off by 1%, easing fears that Google isn't growing faster through its partner network than it is organically. This improvement can be attributed to Android OS' massive 75% market share as well as continued strength with YouTube.
Motorola continues to go through a deep transformation and it isn't expected to bear fruit anytime soon. When Google purchased Motorola Mobility, it inherited a 12 month to 18 month product pipeline, which is currently being worked through. The end goal for Google is to capitalize on multiscreen opportunities by inventing new devices that are faster, stronger, and have more stamina than previous generations. This union hopes drive new experiences, allowing Motorola and Google to engage users in more effective ways. For the quarter, Motorola Mobility earned $1.5 billion in revenue, and reported an operating loss of $152 million.
Focus on the future
The majority of Google's advertisers have opted into mobile advertising, indicating that advertisers are far more interested in the business benefit as opposed to what screen its ads are displayed on. As a result, Google has been working to simplify the experience between its PC and mobile ad platforms. This singular focus allows Google to spend more time helping other businesses improve, which is exactly what these advertisers came for in the first place. Over the long term, this focus should continue to drive profitability growth, while simultaneously improve its business opportunities in the years to come. When I consider these results, it justifies my belief that Google remains a buy in 2013.
As one of the most dominant Internet companies ever, Google has made a habit of driving strong returns for its shareholders. It's more important than ever to understand each piece of Google's sprawling empire. In The Motley Fool's new premium research report on Google, we break down the risks and potential rewards for Google investors. Simply click here now to unlock your copy of this invaluable resource, and you'll receive a bonus year's worth of key updates and expert guidance as news continues to develop.
The article This Tech Giant Continues to Beat Expectations originally appeared on Fool.com.Fool contributor Steve Heller owns shares of Google. The Motley Fool recommends Google. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.