Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Google Inc (GOOG)’s Got Some Explaining to Do

Google Inc (GOOG)Google Inc (NASDAQ:GOOG)’s earnings results are in, and they’re not the prettiest. The company missed expectations by a wide margin and shares took a tumble. Whenever this happens, it’s often wise to dig deeper and see if there’s an underlying issue.

The disappointment
In the second quarter, Big G reported year over year revenue growth of 19% to $14.11 billion, which translated to a non-GAAP income of $3.23 billion, or $9.56 a share. Analysts were expecting Google Inc (NASDAQ:GOOG) to earn $10.78 a share on revenue of $14.42 billion. The culprit appears to be that Google’s cost-per-click — or CPC — declined by 2% sequentially and 6% year over year, despite paid click volume rising by 23% year over year and 4% sequentially. This could indicate there’s potentially a structural headwind that’s driving down the CPC metric.

The dig
Whenever something earnings-related doesn’t add up, the first place to look for answers is the conference call. Unfortunately, this is all that Patrick Pichette, Google Inc (NASDAQ:GOOG)’s CFO, had to formally say on the matter:

“Our aggregate cost-per-paid was down 6% year over year and down 2% quarter over quarter and currency fluctuations in this case had a minimal effect in Q2 CPC growth, and yet our monetization metrics continued to be affected by the usual factors that we’ve discussed many times including geographic mix, channel mix, property mix, our product and policy changes as well as FX [currency fluctuations].”

When questioned later on about if mobile was to blame for the soft CPC, Pichette acknowledged that mobile played a role, but he didn’t elaborate to what degree. However, he did add that considering CPC alone is “dangerous” and should be incorporated with paid click volume to get a better sense of the health of the business. Naturally, the combined metrics for the quarter has the company made the company “very pleased.”

Getting theoretical
Larry Kim, founder and CTO of online advertising specialist WordStream, has a few theories on what could be pressuring CPC. Of the five listed, I think three could be in play here, perhaps in some combination of each other. The first possibility could be that ad inventory is increasing faster than demand and the added supply is pressuring CPC. The second could be that mobile clicks are growing faster than their desktop counterpart, and since CPC is a weighted average between the two, it’s dragging down the average.

The final theory could be that Google’s recently launched AdWords enhanced campaigns are so incredibly effective that marketers need to spend less on a per-click basis to achieve their desired results. If this were to be the case, it would mean that advertisers are likely thrilled to spend less money on a per-click basis, which could ultimately drive new advertising spending on the platform longer term. In other words, this seemingly negative transition to enhanced campaigns would be rather short-lived.

A watchful eye
Truth be told, one quarter of potential trouble isn’t enough for me to say there’s a major issue going on with Google Inc (NASDAQ:GOOG)’s business. Investors should still continue to monitor the situation by keeping an eye on Google’s future earnings results. Ultimately, Google Inc (NASDAQ:GOOG)’s long-term success will be dependent on its ability to drive future advertising spending by offering an ever-improving user experience for both the user and marketer alike. Could it be that Google is getting too good at its job and it’s actually hurting the bottom line?

The article Google’s Got Some Explaining to Do originally appeared on and is written by Steve Heller.

Fool contributor Steve Heller owns shares of Google Inc (NASDAQ:GOOG). The Motley Fool recommends Google. The Motley Fool owns shares of Google Inc (NASDAQ:GOOG).

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.