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Our Uber Growth Thesis For Google Is Intact and Performing Well

Submitted by Reggie Middleton on 10/14/2011 10:34 -0400

Subscribers can expect fresh banking research to be released this
weekend. In the meantime, CNBC reports that our (lone) bullish outlook
on Google is on point: Google Earnings Blow Past Expectations; Shares Surge 13 Oct 2011

Google earnings and revenue blew past expectations, sending its shares sharply higher in after-hours trading.

Google shares finished the day at $558.99 and jumped more than 5 percent after-hours.

"Christmas came early for Google
shareholders," said Colin Gillis, an analyst at BGC Partners. "It was a
great beat on the bottom line. It's not necessarily because they are
controlling expenses. It's because they are driving more revenue," he
said.

This driving of revenue is not inclusive of several multi-billion
dollar start-up ventures that Google appears to be successfully nursing
to the point of generating earnings. We are very, very optimistic about
the Android initiative, which in three short years has become the
dominant mobile OS in the world, up from virtually nothing (see below).
Their expanding cloud services now offer a credible challenge in the
enterprise SaaS space, actually winning large municipal and corporate
accounts from Microsoft's Exchange Server. Display ad revenues are
expanding rapidly as is their core bread and butter search ads (which
they are wisely, aggressively and relatively rapidly diversifying away
from).

The technology company reported
earnings excluding items of $9.72 a share, up from from $7.64 per share a
year ago. Net income rose to $2.73 billion from $2.17 billion. Net
revenue, which excludes fees that Google shares with partner websites,
increased 37 percent to $7.51 billion from $5.48 billion last year.

Analysts had expected Google to post earnings of $8.74 per share on net revenue of $7.22 billion.

Again, a total misunderstanding of how this company operates and the
massive value embedded within in the form of a series of implicit,
premium free call options.

"A lot of people were expecting
spending to be out of control, but they had good control," said Herman
Leung, an analyst with Susquehanna Financial Group.

That's because they couldn't differentiate between spending and
investing. The investments are paying off quite handsomely, both in a
vaccuum and in comparison to historical results, and the company has
kicked investment into overdrive. If a similar ROI can be achieved over
the next year or two, this company will be minting value and owning even
more spaces in the Web, the Cloud, social media, advertising and mobile
computing.

Google said they're getting a good
response to their Google Plus social-networking site, which just passed
the 40-million user mark.

By far and large, the only credible extant threat to Facebook (see Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!).

Aggregate paid clicks, which come from
ads on Google sites and its AdSense partners, rose 28 percent from a
year earlier and the average cost-per-click increased 5 percent from a
year earlier. Though, cost-per-click was down sequentially by 5 percent
from the second quarter.

"The digital economy is still strong.
Google is capturing all the economics from this and we are moving into
the sweet spot when investors want to own Google," Gillis said.

And to think, this is the core revenue driver that the skeptics
feared Google would lose control of, and be subject to excessive
competition.

As excerpted from my diatriabe illustrating Google's performance from the 2nd quarter:
Did A Blog Best Wall Street's Best of the Best In Guaging The True
Value of Google? We Have To Think More Like An Entrepeneur & Less
Like A Wall Street Analyst July 19th, 2011

First of all, congratulations to all
BoomBustBlog subscribers that have recieved windfall profits on their
researched Google positions for the second time in less than a calendar
year. Google traded down to a 4 handle as recently as a couple of weeks
ago and the January 880 calls (which I kept in inventory) were trading
as cheap as 5 cents each. As I type this, those same options last traded
at $1.40 each (now down to 1.05)- that's a 21x-26x return!

Google's latest quarterly results should
lead many - if not most - to believe Reggie Middleton and his team at
the BoomBust bests ALL of Wall Street's sell side research. For previous
examples (a lot of them), reference Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?

It is now well known that Google has once
again knocked the ball out of park with their performance. Those who
follow my blog know that I have been bullish on Google since the spring/summer of last year,
with signfiicant profits being taken along the way. Many on the Street
have turned rather negative on Google despite some of the most positive
results and promising actions of its history, and in the industry! Why
is that? How did I see so much value in Google while the Street was
remiss, only to be taken totally and utterly by surprise? Let's take a
historical traipse of my take on Google, but first we peruse the "short
term-ities", looking forward only three months at at time mentality of
Wall Street to ascertain why only Reggie Middleton's BoomBustBlog
screamed on the The Gross Misvaluation of Google. [Subscribers, please follow along with the subscription documents - Google Q1 2011 earnings review - Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google and the subscriber forensic analysis (63 pg Google Forensic Valuation, to plug in your own assumptions see Google Valuation Model (pro and institutional).]

....

Has Google given investors a reason to believe in Page's diatribe?

Reference the BoomBustBlog post, A Realistic Look At The Success Of Google's Investment History

As promised, I am presenting historical justification of the
logic behind my call of absurdity in the drastic drop in share price
after Google announces a redoubled effort in investment and marketing of
its nascent businesses. I went into the logic in detail via our Google
Q1 2011 earnings review - Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google. The following pages are excerpted the subscriber forensic analysis (63 pg Google Forensic Valuation, to plug in your own assumptions see Google Valuation Model (pro and institutional).

To begin with, Google apparently realized early on that it could
better realize returns by investing shareholder capital through
acquisitions. It has actually been quite acquisitive, making 88
purchases over the last 13 year. Last year was Google's most acquisitive
year, ever!

While many of the referenced
acquisitions have been to bolster existing products, several have
literally become home runs - rising to the top of their respective
categories and even threatening to go farther in that hey have the
distinct potential to creatively destroy the status quo of several
multi-billion dollar industries. Let's walk through a sampling.

Doubleclick + Youtube + Google TV (organically grown)

This combination is probably the
closest thing to a direct replacement for TV as we know it. Even if
Google TV does not succeed, YouTube is currently the most watched video
site, by far and Doubleclick (for monetization, along with adsense style
ads) is the 2nd largest display ad entity. Again, the potential to
reconfigure the TV industry. Google is already seed funding original
content and cutting licensing (streaming rental) deals with the large
established studios. The ability to threaten TV as we know it was
purchased for just over $1 billion. A pretty good investment, no? Would
the NY Times parent co., Fox, Disney, NBC/Universal have considered this
a wise purchase?

Admob and Android

For a mere $250 million (plus ongoing
support and development costs and investments), Google now commands the
largest global footprint of mobile phone OS, the fastest global mobile
phone OS growth rate, the largest (by a very, very wide margin) mobile
ad presence, and inarguably the most disruptive force in mobile
computing. What tech, media, telecomm or strategic investment company
would NOT by the Android/Admob combo now for 10xor eve 15x what Google
paid for it? Microsoft, Nokia, Apple, Samsung, LG, RIM, Oracle, IBM, HP,
anyone???

The list of strategic acquisitions
that have paid off in spades goes on, as well as the requisite flops
that go along with a high volume strategy.

So, assuming that Google has done a
good job at spending its shareholder's money and sprouting several
billion dollar businesses to assist in the diversification away from
pure web search advertising - and realizing that last year was Google's
most acquisitive to date, and realizing that Google is dumping more
money into research, marketing, headcount and acquisitions now than in
any time in its existence (including last year), should you be bullish
on the stock? Three or four more Androids, YouTubes, Admobs and
Doubleclicks to disruptively take over 5 or six more multi-billion
dollar industries is a reason to lop 15% off of this stocks price (which
currently barely accounts for just the search engine potential)???

As excerpted from Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluation of Google:

For the quarter ended March 31, 2011 Google reported gross revenues (before traffic acquisition costs) of $8.58bn, an YoY increase of 26.6% and QoQ increase of 1.6% while net revenues (after traffic acquisition costs) increased 29.1% YoY and by 2.6% sequentially to $6.54bn. The
YoY growth in gross and net revenues was the highest at least since
2008 demonstrating a increasingly momentum in the growth of Google’s
digital ecosystem. The increase in net revenues (after TAC) was
actually stronger than the increase in gross revenues, indicating that
Google has not only packed in growth but lowered aggregate top line
expenses.

However, despite a strong set of
results the stock took a severe beating and was down c8% as the results
were short of analyst expectations. The market’s reaction to Google’s
numbers clearly reflects the very myopic view of US public
markets wherein a stock is dumped if it fails to beat consensus – even
when this view clearly overlooks the broader picture.

Google’s adjusted earnings came in at $8.08 a share below the $8.17 expected by the markets. However,
a closer look at the results reveals that the perceived shortcoming was
not a result of a revenue miss or margin compression but on account of
Google’s entrepreneurial (and quite applaudable – at least from this
investor’s perspective) endeavor to invest heavily in future projects.
The miss was principally due to higher research and development expenses
as the company continues to invest in new emerging businesses
like Display, Mobile and Enterprise. Research and development expenses
(including stock based compensation expenses) grew 50% YoY to $1.2bn and
was 14.3% of gross revenues in Q1 2011 vs. 12.5% in Q4 and 12.1% in Q1
2O10. Had research and development expenses at 12.5% of gross
revenues, the earnings would have been $8.51 per share, a clear beat to
consensus and stock would have seen a roller coaster ride –
despite the fact that future prospects would have been a fraction of
that they are now due to lower investment in the future. Google has
proven that their investments yield superior returns to that of cash
holdings, ex. Youtube, Android, Admob, Google Voice, Teracent, etc.
Instead, the stock was pushed down 8% as the shorter term players in the
market reacted. Players such as sell side analysts whose employers
benefit from the shorter horizon churning of stocks vs. a longer horizon
and outlook, and traders who act on price movement and not value,
were(are) clearly tangled between web of OPEX (ongoing cost for running a product, business, or system) and CAPEX (expenditures creating future benefits).

You see, the Street has become so
accustomed to playing the earnings management game with their favored
companies that most of them have actually lost the ability to ascetain
true value outside of quarterly accounting earnings!

- advertisements -

Wed, 04/25/2012 - 06:36 | 2372712 banik

There has been good progress made. Technology is helping us do whatever we want to do. But on the other hand some problems are also arising. Security issue is one such a problem. So we should be aware and take precautionary steps like installing antivirus in our machines.

Fri, 10/14/2011 - 20:44 | 1775850 Zero Govt

Reggie

Great spin, sorry article, on behalf of Google. Under your microscope their books look 'cooking'. But can i boil down your article to a couple of sentences if that's ok:

"Google are also-rans in lots of fields and some are remarkably even making money. Fuking Wow!"

Did you read Banzais piece above regards a Goo programmer saying top down Goo haven't a friggin clue about platforms? Worry you any in a platform business ?

Apples iPhone 4S came out today. There were cues around the block, despite the rain. You think anybody cued for Goos Android release? Nope. Do you think anybody is going to cue for Android II, III, IV or V ?

Apple have shops Reggie. Microshite and Goofball threatened to open their own but guess what? It was all bluff from 2 big faceless arrogant corporate lemmings. Microshite wouldn't dare because there would be cues around the block at every More-Shite shop of raging punters at the fuking bug-virus jammed garbage they peddle (Windows 7 is such shit nobody selling PC's loaded with it dare mention Gates & Bulmer). They wouldn't sell a product for their pizza-faced teenage slave staff dealing with customer complaints and i'd suggest Goo would suffer the same 'corporate crap consumer boomerang' with Droid

iPhone 4S has a 40% larger pre-release waiting list than iPhone 4 Reggie. It's their biggest product and the cues are just getting bigger Reggie. Where's the 'Wow' for any Goo product Reggie? Goo as a brand against Apple stands (out) for precisely what Reggie? What do your bunch of corporate tarts think they got that Apple hasn't got years ahead of them and can deliver at far higher quality, far more smoothly, reliably and creatively?

Goo and Microshite are sad old nags hobbling along copying the technology pedigree and both also-rans are only good for the glue/goo factory... your sums don't add up (on this occasion) Reggie. Now go muck-out the stables until you've learnt the hard way which horse to back in the big race

Fri, 10/14/2011 - 19:21 | 1775698 tgatliff

Come on Reggie... Admit it..

You are a paid shrill for Google... Its OK. Everyone is doing it these days I guess... It would also explain as well why you are so anti-apple all the time even when apples sales figures keep beating market expectations.

Fri, 10/14/2011 - 20:53 | 1775798 Zero Govt

Have to admit Reggie has me worried at times regards his trumpeting for Google ... still don't think he's a paid 'shill', but Our Reg is getting ever more 'shrill' that's for sure

During the past 3 months of stock market carnage Apples stock price is still UP 5%

Meanwhile Google stock is DOWN over 5% in that same period

Since Reggie 'came out' on his Gooey love affair I've yet to find a week, month or any parameter where their shares have outperformed the classy Apple leaders Goo (like Microshite) are trying ever more desperately to emulate

Pitiful enough to watch these global diseased dinosaur wannabes hobble around trying to pretend they're the next Apple without Reggie regularly highlighting to us their desperate plight forever following the cool King of tek

Fri, 10/14/2011 - 15:05 | 1774823 bank guy in Brussels

Google was developed with CIA seed money, and censors websites from search results to smear and help murder political dissidents who criticise the US regime on the topics the US most fears to be exposed ... like the bribery of US judges, and the way that Google itself, and Wikipedia, are both CIA projects ... Google Inc. now facing heavy fines from the EU Commission for its role in defrauding European governments and people, and helping US criminals to slander and try and murder European citizens:

EU Report, Google Inc. Anti-Competition Crimes & Deception
http://www.indymedia.nl/nl/2011/07/77181.shtml

(Original in pdf format:)
http://eureportsnonzionistjews.hostfile.nl/file/0zndj5ea3v/410/nzjd-eu-r...

Live Photo: Google Inc. Caught Censoring EU Search Results - Screenshot of Google computers admitting to blocking 19 websites from search results, so Google can pump lies about a topic into the top spot, and totally hide much truth from web users:
Google Internet Censorship - Censure d'Internet par Google - Internet censuur door Google
http://www.flickr.com/photos/22325431@N05/6100668211/in/photostream

Fri, 10/14/2011 - 16:49 | 1775253 SilverRhino

So has anyone started a censorship free search service that can keep up or approach google?

Fri, 10/14/2011 - 17:21 | 1775352 Zero Govt

i've switched to Yahoo for search.. i can honestly say i find little difference in performance from Google... in other words both their search results are about as crap as each other

try it yourself for a week or two ...feel for yourself the (non) difference

but i don't think you quite got the point (a bit like Google search results). He was complaining Google are a bunch of corrupt CIA sheisters as a corporation, nothing to do with their 'front' as a search engine. i think your answer was largely irrelevant (a bit like Google search results)

Keep swinging and missing mate.... same as it takes me 3 attempts to get anything out of Google and Yahoo search engines!!!

Fri, 10/14/2011 - 17:03 | 1775301 Ag1761

I've always drifted away from the good once they start getting too big and the rot starts to set in.

I'm using http://duckduckgo.com/ just now, find that quite clear cut and configurable, does what it says on the tin for me. Probably move away from them in a couple of years once they either take over Google or get bought up.

Worth a try..

Mon, 10/17/2011 - 17:37 | 1783084 SilverRhino

Awesome ... thanks.

Fri, 10/14/2011 - 18:31 | 1775568 devo

Sweet, I am now using this and promoting it on FB. Fuck Google.

Fri, 10/14/2011 - 13:44 | 1774458 devo

Google reminds me of Enron...a black box that churns out profits, but nobody really understands how they do it. If I trusted their earnings and balance sheet, and if they were truly not evil, I'd invest long term. I take issue with the "don't be evil" mantra, when they are, in fact, beyond evil. Invading people's homes (i.e. listening to conversations via your computer's microphone) is disgraceful. There are "rumors" they share this information with the government, too. Shame. Disable your microphones, folks.

Fri, 10/14/2011 - 14:48 | 1774712 unerman

You must not be in the Internet marketing industry.

I am. It is almost impossible to do any marketing on the net without cutting a check to Google. The amount of ad space they control is huge. It is not hard to profit when you control that much traffic.

Fri, 10/14/2011 - 15:27 | 1774897 Quinvarius

Ok. We have established that you own Google stock. Thanks.

Fri, 10/14/2011 - 13:32 | 1774420 The Axe

Please..Reggie...complete BS....You can buy the Jan 850 .15 to .30 cents right now...the Jan 880 did not even trade today...or ever at 1.40...... I got a thousand dollars,,says this is wallpaper.

Fri, 10/14/2011 - 13:26 | 1774394 CH1

Honestly, I think Google's advantage is that it has crawled into bed with the state.

Fascism works really well for insiders.

Fri, 10/14/2011 - 12:44 | 1774223 Quinvarius

The reason I don't believe Google's ad baloney is they sent me tons of free ad clicks over the past few months. They emailed them to me and mailed them to me if I would come back to their service. They must be counting customer ad revenue money as their own, because most sites won't rack up the minimum to get paid right away.

The reason I stopped using google was they kept stealing my ad money. I'd get paid once, then I'd rack up another check and they would cancel my account when I reached the threshold and keep my money. I told a friend he could create a google ad account and put his ads on my site for free becasue I could no longer do it. They did the exact same thing to him. They, paid him once, when when his next check was due, they cancelled him and kept the money.

In my opinion, Google is counting customer money as their own this quarter.

Fri, 10/14/2011 - 14:54 | 1774757 unerman

You don't believe it because you don't have enough traffic to qualify for a check, in their Adsense program? Is the minimum for a check not $100 for a month period?

1. That is one part of their biz
2. You probably got termed for clicking on your own ads. I suspect this if you had trouble earning $100 in a month.
3. For every failure story, there is a winner story. I get cut about $100k per month from them. And I run a small company. Their are tons and tons and tons of companies larger than me, happily earning every month.

Fri, 10/14/2011 - 15:13 | 1774851 Quinvarius

That is not what I said though, now is it?

I said they stopped paying me and kept my money. But you can schill for Google if you want. LOL. I know what they really do.

Fri, 10/14/2011 - 11:48 | 1773924 falak pema

how do google's numbers EPS etc. compare to Aapl? They both seem strong but head on in smartphones.

Google is absent from Aapl store and ipad type segments. But it dominates search engine. As RM says Google big on future R&D so race stays on.

Fri, 10/14/2011 - 13:34 | 1774431 mind_imminst

AAPL and GOOG will continue to do well. GOOG is definitely going to stay strong in the smart phone space because Android moves so much faster than AAPL's iphone. AAPL cannot keep up with the pace of technology in this space (if they remain closed) but it will not mater for a couple more years because AAPL has a religious and rich following. AAPL makes cool useful I-thingy's and their fan base will buy the stuff no matter the cost.

However, even as GOOG grows somewhat and maybe even dents Facebook's social presence, I don't think the stock price can soar too far because of something GOOG engineers mentioned this past Summer. They said that once you get up to exascale-type computing, "everything breaks", meaning that they are reaching the limit of how much data they can move around, how many users they can support, how fast they can adapt (based on current technology and software). Companies can only get so big before they reach diminishing returns. This eventually shows up in their stock prices.

Fri, 10/14/2011 - 13:34 | 1774430 mind_imminst