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Thursday after the close, Google's posted Q2 profit of $9.71 billion, or $9.54 a share, up 19% from $8.54 billion, or $8.42 a share, in the same quarter a year earlier. Revenue rose to $11.1 billion from $9.61 billion.
Those numbers came in below the consensus estimates of $10.80 EPS on revenue $14.45 billion. And, the surprising miss spooked investors in Google stock. Shares tumbled 5% in afterhours trading and another 3.38% in early morning trading Friday.
Google still views the explosive shift to smartphones and tablets as a lucrative opportunity for Google stock investors and the company. But, the Internet search giant's second quarter results serve as a stark reminder of just how financially challenging the early stages of that opportunity can be – even with an $11 billion-plus quarter.
In recent days, there was plenty of chatter about Google shares breaking through the $1,000 price barrier, a milestone that now looks a ways off amid the earnings miss.
Breaking Down Google Earnings
The following contributed to the lukewarm Google earnings.
- Falling Ad Rates: Google's average ad rate fell from the previous year for the seventh straight quarter. Moreover, in an unexpected turn, the decline deepened for the first time in a year. The average ad rate, or cost per click, dipped 6% in the April-June quarter. That was especially disappointing given the size of the declines has waned in each of the previous quarters, raising hopes that the worst was over. However, things worsened from the 4% decline in ad rates during the first three months of 2013.
- Ballooning Operating Expenses: Also bothersome was the 27% increase, to $4.25 billion, in Google's operating expenses. That jump fueled concerns that Google is spending too much money on far-reaching projects, such as driverless cars and balloons equipped with Internet beaming antennas, instead of maintaining a focus on its core business of Internet search and advertising.
- Motorola Mobility: Google bought ailing cellphone maker Motorola Mobility 14 months ago for $12.4 billion, and the acquisition is proving expensive. The subsidiary lost $342 million in the latest quarter, up from $199 million. Since under Google's ownership, Motorola has lost a whopping $1.7 billion, despite accelerated efforts to stop the bleeding through layoffs and divestures. CEO Larry Page wouldn't predict when Motorola might start making money, but he did say on the conference call he was enthusiastic about the upcoming release of the new smartphone dubbed Moto X.
A number of analysts trimmed their price targets on Google stock by as much as $40 (with the lowest being $860) to factor in a drop in margins as the company pours money into pioneering businesses.
But brokerages such as Piper Jaffray, JMP Securities and Canaccord Genuity boosted their price targets, citing these developments that will boost Google stock in the long run…