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Google's Never-Ending Search For Higher Prices

NEW YORK ( TheStreet) -- Google's (GOOG) second-quarter earnings report, was initially met with heavy selling, as that most telling of metrics, costs-per-click, continue to decline.

Investors, however, may be missing the forest for the trees.

Google earned $9.56 per share on $11.1 billion in revenue, excluding traffic acquisition costs. When those costs, which Google shares with its partners, are included, the company generated $14.11 billion in revenue for the quarter. Analysts were looking for $1.078 per share on $11.billion, excluding traffic acquisition costs.

Much of that earnings miss came from the continued restructuring going on at Motorola, investments in Google's future and a higher tax rate. The restructuring at Motorola will continue to take time but investing in Google's future, particularly on projects such as Google Fiber, makes long-term sense for shareholders.

On the earnings call, CFO Patrick Pichette said Google will "always have profitability as one of the key criteria" when it comes to entering a business. Google is doing the right things by investing in the long-term future of its company, even if expenses rise in the short-term. That's something investors should welcome, not deter.

While costs-per-click declined, Google made sure to note that paid clicks, which include clicks related to ads served on Google sites and the sites of its network members, increased approximately 23% year-over-year.

The main point is this: there is still considerable growth ahead for Google's core business, which is advertising. Google's core revenue rose 20% year-over-year. When you factor in that the stock, which is up 26% since the start of the year, is only trading at 20 times earnings, that's not terribly expensive. This stock still has a lot of upside.

"They have a solid business model that has been adversely affected by mobile adoption in terms of advertising revenue but what they offer is better than anything that Apple and Microsoft have available at the moment," said Warwick Business School Associate Professor John Baptista in an email. "So I think this is a bleep in the long term performance of the company, and I don't see how it reflects any major flaws in their strategy and product line."

The mobile advertising business is still weak, Earnings results from Yahoo! (YHOO - Get Report) earlier this week confirmed that. Next week, we see if Facebook (FB - Get Report) can escape the trend.

However, Google has more going for it, then just advertising. The company is entrenched in nearly every way of the Internet, almost a tech holding company at this point. It has the world's most dominant mobile operating system, beating Apple's (AAPL - Get Report) iOS. It's diversified into hardware, with its purchase of Motorola. YouTube is on fire, with Nikesh Arora noting that "YouTube's mobile revenue in June of this year was three times what it was at the beginning of the year." The Google Play Store just recently surpassed 50 billion app downloads, and continues to gain traction.

UBS analyst Eric Sheridan, who rates shares "buy," with a $945 price target, believes these items provide "multiple opportunities for accelerating growth." Any sell-off from the results could be short-lived, as investors realize Google is doing the right thing for its future, and shareholders alike, notes Sheridan. "We expect any sell-off in Google's shares to be short-lived given the forward growth initiatives & 2014 valuation."

Google's track record of innovating (Android, driver-less cars, Google Glass) is what has JPMorgan analyst Doug Anmuth recommend investors buy any weakness in the name. "Light revenue was largely attributable to self-inflicted policy changes impacting the Google Network and we're comfortable with the magnitude of increased investment spending given Google's track record on innovation and many large growth opportunities ahead," Anmuth wrote in his note. "We continue to believe that mobile and display, Enhanced Campaigns, and Google Shopping/PLAs (Product Listing Ads) should drive stronger Y/Y growth in 2H13 and into 2014."

Several others on Wall Street defended the name, saying a "buy-the-dip" mentality should be implemented. Deutsche Bank analyst Ross Sandler, who lowered his price target to $970 from $1,010, noted that "Google's most important metric, websites revenue growth, was in-line and up 18% Y/Y, demonstrating strong core fundamentals. We have largely maintained our 2014 core net revenue and reduced overall EBITDA by 2%, we would add to positions."

Citi analyst Mark May, who has a $1,005 price target on Google, agreed. Despite the fact that Google's core revenues were 2% below estimates, he continued to believe that Google will generate 18% revenue growth, "and view the valuation at 10x EV/CY14 adjusted EBITDA as attractive and the stock as a core holding."

As more users search on phones and tablets, it's imperative that the revamp in Enhanced Campaigns pay dividends for Google. Many are expecting that the second half of 2013 and 2014 will be the time CPCs start to turn around, and can add to the growth seen in paid-clicks, and not be a detriment.

Right now, investors are willing to give Google the benefit of the doubt that mobile advertising will be on par with desktop ads. Combine that with the rest of Google's issues that it's got going for it, and the longer-term trend is up, not down. That's got Google shareholders searching for higher share prices.

-- Written by Chris Ciaccia in New York

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