- While GOOG’s 1Q14 miss is disappointing, it is not particularly unusual in its history of focusing on the long term. To that end, 19% sales growth is a healthy indicator for the future.
- Network ad sales grew just 4% as GOOG is capturing more ad dollars on its own sites through programmatic ad buying. TAC is now at a record 3 year low of 23.3%
- The bottom line miss was exacerbated by a 400bp boost to OPEX, mostly due to unusual legal expenses and costs associated with integrating Nest that will be resolved by next quarter.
- The miss had GOOG off over 3% after hours. We do not see the results as alarming, and would use weakness as an opportunity to add what we see as the best positioned player in the sector.
Earnings happen. Google, like its archrivals Amazon and Facebook, maintains a blasé attitude toward its short term results. This long-term approach, while ostensibly to be applauded, has an annoying tendency to periodically bite investors in the portfolio. Google’s first quarter report is an example of this habit. The numbers were short on both the top and bottom lines, and the stock tumbled after hours, eventually recovering to just 3.15% down. In its past 4 misses, Motorola’s hardware business was the prime culprit, but this time it seems to be a bit of over exuberance in sales estimates combined unusual items that drove OPEX up 400bp. Legal fees likely stemming from the recent stock split drove G&A up, while Nest’s heavy R&D flowed through the P&L taking the company from a historic R&D rate of 12% of revenue to 14%. Despite this little speed bump, things look more than alright in Mountain View.