Once Again, Solid Quarter Shows Power of Google's Economic Moat
Results show the firm's core business is resilient despite competition from Facebook and Yahoo.
Results show the firm's core business is resilient despite competition from Facebook and Yahoo.
Google (GOOG) posted a quarter of solid growth in revenue, earnings, and cash flows that were modestly ahead of our expectations. We anticipate making a very slight increase to our fair value estimate.
The positives in the third quarter were mostly in line with our thesis. Google's results show that its core business is resilient despite competition from Facebook and Yahoo . Once again, we believe Facebook's near-term threat to Google's financial results is overblown. Because we believe that Google's economic moat has essentially tied users to the company's services, we look to the growth in paid clicks as a validation that its moat is strong and stable. To that end, Google achieved double-digit growth in paid clicks, with a modest offset in the prices paid for each of those clicks. Google's quarterly revenue growth was an impressive 33% from 2010, well ahead of our estimates for industry growth.
Despite another quarter of a double-digit percentage increase in head count, we saw operating margins stabilize at about 31%. With a 9% growth rate in quarterly head count, we are encouraged by the firm's profitability, particularly in light of heavy investment in the mobile Android ecosystem and Google+, the company's recent social initiative. In fact, according to our analysis of operating income per employee, the third quarter represented an uptick after a dramatic decline throughout 2011. The company posted about $97,000 in operating income per employee for the quarter, an 18% improvement from the second quarter. We expect operating margins to expand going forward.
We did not receive any additional clarity regarding the continued competitive assault on the Android ecosystem via battles over intellectual property. We continue to believe there are a large number of players including handset providers and wireless carriers that would like to prevent a world where Apple (AAPL) is the dominant smartphone provider, and Android will be the best outcome for most of those players. Although we expect continued courtroom battles that will take attention and resources from Google's core business, we think investors should feel encouraged that there are currently more than 190 million Android devices in users' hands.
We would also remind investors that Google is not immune to an economic slowdown. Management admitted that the company is seeing some weakness in Western Europe, although other geographies are quite strong. As with the last recession, we would expect Internet search advertising to feel less negative effects than display and other advertising channels, such as print and radio.
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