Google And Other Growth Stocks In A Stop And Go Economy
Good growth stocks are great long-term rides that the market eventually rewards.
Google's June quarterly report on my first reading told me that they'd gotten their act together. Year-over-year revenue growth was 24%. Non-GAAP earnings, what everyone keys off, rose to $6.45 a share compared with $5.36 a year ago, nearly a 20% gain. Operating income grew 24%.
In the market we're in, this kind of ciphering gets you nowhere. First of all, earnings missed the analyst consensus by a dime. More seriously, the pre-tax operating margin was flat compared with the year-ago quarter. Analysts use paid clicks as a leading indicator of the sustainability of Google's growth rate. Paid clicks grew 15% year over year, but eased 3% from the preceding quarter. Costs per click rose 4%, year over year.
Meanwhile, management turned aggressive in all aspects of building its site's network footprint. R&D, marketing and overhead ramped up. There were nearly 1,200 new hires between March and June this year on a 20,000 base. In short, management pressed across the board to grow its business footprint, what you'd expect a great company to do, but the market hates to see overhead ramp up so markedly.
Mr. Market finally has adopted the slow growth economic scenario for the country. Although Google grew handily throughout the 2009 recession, the stock underperformed, literally cut in half from the $700-plus high late in 2008.
Google is a free cash flow machine. Capital spending pretty much is confined to infrastructure data centers, servers and networking equipment. Free cash flow runs at better than a $6 billion clip, growing 25% year over year. Nobody cares.
Google, comparable with Apple, is a treasure chest of liquidity, some $30 billion. Unlike Apple, so far, it is fearless about deal-making in its sector of special competence--the Internet. YouTube is very ripe for more growth and closer to monetizing its viewership.
