Why Google Is OK but Still Priced High

 | Jul 19, 2013 | 10:09 AM EDT
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Yesterday's Google (GOOG) report was a bit of a shock for many investors.

Google has recently overtaken Apple (AAPL) as the darling of many hedge funds and other investors.

It used to be fashionable to complain about the shift to mobile and how that's going to hurt Google. More recently, though, it has become common for pundits to declare an all-clear on Google.

"People still need to search in a mobile world. They're knocking it out of the park on display. YouTube's a monster. And you get a free call option on driverless cars and whatever else the geniuses over there think up."

Last night's report fell short on both earnings and revenue. The stock initially sold off 5%.

The culprit again was cost per click (CPC), which was down 6% year over year and 2% sequentially. Again, investors were worried about the specter of mobile for Google.

This morning, unlike Microsoft (MSFT), which also disappointed investors last night, Google is recovering. Some analysts are defending the quarter and causing some to believe that the selloff is overstated.

The two defenses for the quarter misses were: 1.) Yes, CPC was down, but paid clicks were up, and 2.) They're investing for the future ... give them a little credit.

Look, Google is a terrific company. It has its stuff together much more than Facebook (FB) does. Google is a well-oiled machine that employs amazingly bright people, and it will continue to do well. So I don't want to take an overly negative view on the quarter. But I want to point out that there has been a love fest going on with the company that you should be careful of.

Tech blogger Kara Swisher tweeted last night that she couldn't understand Wall Street, because Google missed expectations a little and the stock sells off, while Yahoo! (YHOO) on the prior day provided some humdrum earnings and the stock rockets up 10% the next day.

But she's put her finger on the difference between those two companies: expectations. Google has got great expectations. Yahoo! not so much (although its expectations are a lot higher now than they were a year ago).

When you buy Google around $900, you're getting a stock that has doubled from the $400s, where it spent much of 2010 and 2011.

The threat of mobile is there. CPCs will probably continue to drop. However, paid clicks increase. Overall, I believe one will balance out the other. But where does that leave you? With a cash-cow business that is stable, not growing by leaps and bounds.

The biggest issue facing Google is that a lot of advertisers are at peak budget allocation to Google. They've discovered it, use it, love it. But when they allocate more money to advertising on the web in the future, I suspect it's going to go to other outlets rather than Google.

Google's not a go-go growth stock anymore, even though it's a solid company.



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