Ed’s Daily Notes for July 19th   1 comment

Wall Street Journal: Google’s Revenue Reignites Mobile Worries

Much ado about nothing:

Google reported lower-than-expected second-quarter revenue, reigniting concerns about the impact of mobile devices on online advertising prices and the Web giant’s push into lower-margin businesses.

Sounds bad, huh?

The Mountain View, Calif., company reported a 20% rise in revenue from its core business in the three months that ended June 30, slightly lower than the 22% revenue rise seen in the prior two quarters. The company also reported a 16% rise in profit for the second quarter in a row.

The revenue isn’t rising as fast as previously? That’s the problem? Not really. This is it:

But Google couldn’t stem a drop in search-ad prices. The “cost-per-click,” or the price that advertisers paid Google every time someone clicked on an on its search engine, dropped 6% from a year ago. Analysts had expected prices to drop by only about 3% in the second quarter.

During an earnings call with analysts, Google’s Chief Financial Officer Patrick Pichette said “clearly, mobile has some effect” but overall the “health of the business” was positive, given that Google saw 23% more clicks on its ads in the second quarter compared to a year earlier, offsetting the lower prices.

The other problem:

Google has worked to slim down its troubled Motorola MSI -0.10% hardware-design and manufacturing unit, which it acquired in May of last year. But on Thursday, Google said Motorola posted a second-quarter loss of $342 million, up from a $271 million loss in the first quarter.

The company plans to spend as much as $500 million to market Motorola’s new flagship smartphone, the Moto X, starting later this year and it’s working on a slew of other devices, people familiar with the matter have said.

The bottom line:

The losses at Motorola, among other factors, contributed to a lower-than-expected earnings per share of $9.54 in a second quarter, up 13% from $8.42 a year ago. Analysts had been expected earnings of about $10.80 per share.

…Overall, Google’s second-quarter profit of $3.23 billion was up from $2.79 billion a year earlier. Including its Motorola unit, Google’s revenue rose by 19% to $14.11 billion in the second quarter.

Analysts can nitpick the clicks and Motorola all they want, but the bottom line shows a 13% increase in EPS and a 19% increase in revenue. I know the markets will give Google a smackdown today, but as a long-term investor, I am not worried. Google is still the 800 pound gorilla in the tech industry, and nothing has changed for the long-term with this earnings report.

Bloomberg: Microsoft Profit Misses Estimates Amid Surface Writedown

The other miss yesterday:

Microsoft Corp. (MSFT) reported fourth-quarter profit that missed analysts’ projections by the biggest margin in at least a decade as demand weakens for personal computers running Windows. The shares fell in extended trading.

Results also were hurt by a $900 million writedown of Surface tablet inventory, shaving 7 cents a share from earnings. Excluding that, fourth-quarter profit was 66 cents a share, Redmond, Washington-based Microsoft said yesterday in a statement. Sales rose 10 percent to $19.9 billion. Analysts had predicted profit of 75 cents and $20.7 billion in revenue.

…PC shipments fell 11 percent last quarter, according to Framingham, Massachusetts-based IDC. Surface, Microsoft’s first-ever computer, shipped just 900,000 units in the December and March quarters, according to IDC. Microsoft cut the price on one version, Surface RT, this week.

…Microsoft Chief Financial Officer Amy Hood said consumer PC shipments dropped 20 percent in the quarter. That also hurt sales of Office software, she said.

…Net income for the fiscal fourth quarter was $4.97 billion. The company reported a net loss of $492 million a year earlier, which included a $6.2 billion writedown related to Microsoft’s 2007 acquisition of AQuantive Inc.

…Microsoft reduced its forecast for operating expenses for the year that started July 1 to $31.3 billion to $31.9 billion. Capital expenditures, on the other hand, increased more than Microsoft had forecast last quarter. That area will continue to rise as the company focuses more on Internet-based services that are run out of Microsoft’s data centers, Hood said.

Microsoft makes for an interesting comparison with Google (numbers are for the trailing 12 months from the previous quarter, not the quarter reported yesterday):

Revenue: GOOG $53.5 billion vs. MSFT $76.0 billion
Cash: GOOG $50.1 billion vs. MSFT $73.8 billion
Levered Free Cash Flow: GOOG $10.9 billion vs. MSFT $22.3 billion
Diluted EPS: GOOG $33.42 vs. MSFT $1.94 (NOTE: This disparity is due to the much larger number of shares outstanding for MSFT)
Profit Margin: GOOG 20.9% vs. MSFT 21.6%
Trailing P/E: GOOG 27.25 vs. MSFT 18.29
PEG Ratio: GOOG 1.30 vs. MSFT 1.41

Microsoft is still a much bigger company than Google as far as money goes. However, Microsoft is also much more vulnerable to the “pc to mobile” switch, with pc-related high margin products like Windows and Office being the main contributors to their bottom line. While Google might make less from mobile, they CAN still make money, whereas Microsoft is still a big mobile question mark.

On top of this, I don’t like Steve Ballmer, Microsoft’s CEO. Too often, I get the feeling he is floundering for ideas to improve the business (a “Surface” laptop? Really?), rather than working a master plan. Google’s leadership plan is clear: innovate, innovate, innovate. Microsoft reminds me of the old Warren Buffett saying:

“I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”

Microsoft is idiot-proof for now, thanks to large margins and plenty of cash. Unfortunately, this won’t last forever unless they can find a way into mobile. But I would take a chance on them if their stock dropped far enough, preferably around $25-26 at least, although I wouldn’t call it a super bargain until $23 (their dividend would be 4% at this price, which is where it should be). I am hoping the markets really beat Microsoft down.

Governing.com: Bankrupt Cities, Municipalities List and Map

With the news of Detroit’s bankruptcy filing, I found this information useful to keep it in perspective:

…bankrupt municipalities remain extremely rare. A Governing analysis estimated only one of every 1,668 eligible general-purpose local governments (0.06 percent) filed for bankruptcy protection over the past five years. Excluding filings later dismissed, only one of every 2,710 eligible localities filed since 2008.

The majority of filings have not been submitted by bankrupt cities, but rather lesser-known utility authorities and other narrowly-defined special districts throughout the country. In Omaha, Neb., 10 sanitary districts have filed for bankruptcy, accounting for nearly a third of all Chapter 9 filings since 2010.

It’s also important to note that only about half of states outline laws authorizing municipal bankruptcy.

Unless you are directly impacted by these bankruptcies, I wouldn’t read too much into them, other than remembering what political promises are ultimately worth: Nothing.


Posted July 19, 2013 by edmcgon in Market Analysis, News, Stocks

One response to “Ed’s Daily Notes for July 19th

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  1. I agree, Google is going to come thru this just fine and if it had dropped a few more % points I might have made my first purchase.

    Given all the smart phone misses, what does everyone think of Apple’s earnings chances? I’m in for a boat load at around 490. Should I get ready for some hurt?

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