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Buying Google Inc (GOOG) on Earnings Weakness

Google Inc. (GOOG)Google Inc (NASDAQ:GOOG)‘s earnings were below analysts’ expectations last week, and this has generated some concerns among investors. After rising by nearly 30% in 2013, the stock is certainly vulnerable to a pullback on disappointing earnings figures. However, the Google Inc (NASDAQ:GOOG) growth story is still intact, and long-term investors should consider any retracement a buying opportunity in this dynamic growth company.

Online Advertising

Google Inc (NASDAQ:GOOG) is still delivering healthy revenue growth, sales increased by 19% for the quarter, although they were a tad below analysts’ expectations at $14.11 billion versus the $14.4 billion estimated by Wall Street analysts, that kind of growth is quite impressive for a company of its size.  Adjusted earnings per share of $9.56 where a bigger disappointment though, analysts were forecasting $10.78 on average.

One reason for the earnings miss was falling costs per click, meaning the price that Google Inc (NASDAQ:GOOG) charges for its ads. The shift of users from desktops to mobile devices is pushing down costs per click rates on an industry wide basis, and Google is no exception to the general rule. Mobile ads are cheaper that traditional desktop ones, but Google still delivered a 23% increase in volume which more than compensated the decline in prices.

Yahoo! Inc. (NASDAQ:YHOO), in comparison, reported an 8% decline in costs per click excluding Korea for the last quarter, but made it up in volume with a 21% spike in the number of clicks. The trend is the same here, growing volumes and falling prices, but it’s worth noting that both companies are doing quite well on a total revenue perspective, and Google Inc (NASDAQ:GOOG) also continues outgrowing Yahoo! Inc. (NASDAQ:YHOO).

Microsoft Corporation (NASDAQ:MSFT) said online advertising revenue was up 11% for the quarter, driven by both rate and volume improvements in its search business. However, management is expecting revenue to grow in the low double digits in the next quarter as lower costs per click will affect Microsoft Corporation (NASDAQ:MSFT) too.

According to COMSCORE, Inc. (NASDAQ:SCOR), Google has a market share of 66.7% in the U.S. search market, way above Microsoft´s 17.9% and Yahoo´s 11.4%. Even if we consider Microsoft and Yahoo! Inc. (NASDAQ:YHOO) as a single competitor, which is reasonable considering that both use Microsoft Corporation (NASDAQ:MSFT)´s Bing technology, their joint participation of 29.3% would still be less than half that of Google´s.

Google is the top dog in online advertising, and the company continues outgrowing the competition. This is a crucial advantage in an industry in which competitive strength builds upon itself; the more we use a search engine, the more it learns about ourselves and the better it gets. Google is bigger because it’s better, and it’s better because it’s bigger.

The mobile revolution means that costs per click will most likely remain under pressure, but at the same time it means rapid growth in paid clicks. Falling prices are being more than compensated by growing volume, and overall revenue is still showing healthy growth, so things don´t look so dismal for Google.

Besides, the company is in a position of exceptional strength to capitalize the opportunities coming from mobile. Google´s Android operating system is the unquestionable leader in global smartphones platforms, especially when it comes to high growth emerging markets, and it has also been gaining market share in tablets over the last quarters.

Apple Inc. (NASDAQ:AAPL) owns the high-end segment of the market, but Google Inc (NASDAQ:GOOG) is well entrenched into Apple´s ecosystem too. The Apple Inc. (NASDAQ:AAPL) Maps fiasco has proven how important Google is for iOS: applications like Maps, Search, Gmail and YouTube among many others are vital for both Google and Apple Inc. (NASDAQ:AAPL). In fact, Google is believed to make more money in iOS devices than in Android ones.

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