Friday, 30 January 2015

Google - double digit growth and getting closer to 5% FCF

Google has rather fallen out of favour over the last year underperforming - as shown in this great chart via Fast FT - the broader US indices.

I observed three months ago (link here) the continued opportunities (in my view) with the stock and did pick up a further holding below US$500/share during December. 

So what to make of the numbers after the Thursday close?  Well the initial headlines were not so great but - as I write - the pre-market futures on the stock are slightly positive.  

I can see why there were some initial concerns.  The two most insightful charts in the Google presentation document are always the cost-per-click...

...and price-per-click graphics:  

Rather than create potential reader eye-strain in trying to spot the key metrics from these graphics here is the net data over the last year of the two in combination: 

Period / Cost % yoy  / Paid % yoy  / Net % yoy

Q413/ 31 / -11 / 20
Q114 / 26 / -9 / 17
Q214/ 25 / -6 / 19
Q314/ 17 / -2 / 15
Q414/ 14 / -3 / 11

As is often the case with can argue it both ways.  A 'bear' will observe the falling net cost-paid click metric, whilst a 'bull' will observe that the price compression Google was suffering continues to broadly abate whilst the net line still implies a double digit growth rate.

I continue to take the latter view.  In a world of slowing US corporate earnings growth, Google is not immune either but given such a backdrop a double digit growth number can still be very pleasant...and that's even before we get to cash flow considerations (more on these later).  There also continues to be some highly excitable internal dynamics and themes, for example as noted on the conference call: 

'Online growth remains strong with Google Shopping traffic on mobile devices up nearly 100% compared to Q4 2013. For much of the holiday season mobile shopping clicks exceeded those on desktop as users increasingly made purchase decisions on the go'


'YouTube now has more than 1 billion users. Everyday people watch hundreds of millions of hours of video on YouTube, generating billions of views. Watch time is up 50% year-over-year'.

Profitability is not an easy one to pin down however with these Google numbers.  A US$500m FX hit impact, real estate purchases and receipts from Motorola asset sales.  As the CFO said on the conference call:

'So there you have it, despite a noisy quarter from a P&L perspective. We can say that we had strong results in our core business as evidenced by our 18% fixed FX growth this quarter and are well-positioned for the year ahead in the long-term'

The cash flow data was also similarly influenced.  Deduct the c. US$900m of extra real estate spending and the free cash line continues to move closer to a US$15bn annualised equivalent.  That's a magic number for me as at the current US$295bn EV this would equate to a 5% free cash flow yield.

So do I really worry about my Google holding?  Absolutely fact if it falls below US$500/share again I will be augmenting my position.  

In short, on Google, I am keeping the faith in a company I regard as a strategic positive thematic machine.  

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