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Google Inc (GOOG) Has a Ton of Potential Despite a Miss on Earnings

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Google Inc (NASDAQ:GOOG)Google Inc (NASDAQ:GOOG) missed analyst expectations in its recent earnings report, but was still able to grow revenues at a fairly steady rate for the second quarter. The primary reason for the miss was because of rising costs, combined with slowing rates of revenue growth.

Earnings discussion

The company reported a 19% year-over-year improvement on revenues in the second quarter. The growth in revenue primarily came from international growth. Growth excluding the United Kingdom and the United States was 28% year-over-year. The company’s growth is heavily dependent upon international expansion.

The company’s net income per share grew from $8.54 in the second quarter of 2012 to $9.71 in the second quarter of 2013 (14% year-over-year growth). This fell short of the consensus earnings estimates of $10.78. As a result, the stock fell after hours on the day it announced its earnings. At the time of this writing, the stock has declined by 4.14%.

The company fell short on earnings for the quarter because the costs of running the business went up at a much higher rate than revenues could grow. The operating margin from its core operations fell from 31% to 26% year-over-year. The company’s Motorola segment also reported a decline in its operating margin from -6% to -22% year-over-year. The worsening of operating profitability across its main business segments made it difficult for Google Inc (NASDAQ:GOOG) to come out ahead on its earnings.

Outlook

Google Inc (NASDAQ:GOOG)’s management team justified the added spending by saying that it was necessary. The company says that it’s going to be overspending in some quarters and spending less in others. The fundamental issue is that sometimes the long-term goals of the company are in conflict with short-term profit seeking. That being the case, the management believes that Google Inc (NASDAQ:GOOG) is well positioned to exploit growth opportunities in the mobile market in the future.

The company also mentioned that adults have increased the amount of time they spend accessing the Internet on mobile devices by 273% between 2009 and 2012. Mobile is a hotly-contested space, and the company’s management team is working out ways to better monetize mobile advertising.

Google Inc (NASDAQ:GOOG) believes that there is a lot of pent-up growth opportunity in its Motorola segment. The only problem is that it hasn’t been able to perform. Most of the growth at Google Inc (NASDAQ:GOOG) is coming from Android and its core search business. The international side of the company should be able to grow at relatively high rates as the addressable market for Internet search services will continue to grow in the future.

Analysts estimate that the company will be able to grow its earnings by 15.5% for the 2013 fiscal year. Analysts are projecting the company to maintain a growth rate of 15.23% over the next five years. This growth should be maintained so as long as the company manages its cost effectively and is able to sustain its international growth.

How the competition is shaping up

Microsoft Corporation (NASDAQ:MSFT) reported 9% growth in its online services segment. The online services are composed of Bing and other web properties like MSN. Bing’s market share grew by 2.9%, which helped the company to sustain its revenue growth.

In its most recent quarter, Microsoft Corporation (NASDAQ:MSFT) faced headwinds from falling PC demand along with declining revenue growth from Microsoft Office due to the transition to Office 365. The gaming segment reported low rates of growth due to the console refresh. The company seems to have missed on both revenues and earnings. But on the bright side things are expected to improve in 2014, as most of the issues the company faces are temporary. Analysts anticipate Microsoft Corporation (NASDAQ:MSFT) to grow revenues by 6% in 2013, and 6.3% in 2014.

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