Google: Late for Work and the Motorola Won't Start

NEW YORK (TheStreet) -- It's been over a year since search giant Google (GOOG) paid an estimated $12.5 billion to acquire Motorola Mobility (MMI). In addition to securing a portfolio of valuable hardware patents, the move was supposed to allow Google to improve its competitive position against (among others) hated rivals Apple (AAPL) and Microsoft (MSFT) in the race toward smartphones and tablet supremacy.

Except, it has not worked. And on the heels of the company's third quarter earnings report, investors are beginning to wonder if it ever will.

The Quarter That Was

Growth has never been an issue at Google. This time, revenue soared 45% in the quarter to $14.1 billion. Though net revenue fell short of estimates, it still produced year-over-year growth of 51% -- reaching $11.33 billion. This was particularly noteworthy because it included traffic acquisition costs.

On the other hand, Google missed EPS estimates by 15% -- a meaningful disappointment. Not only did earnings per share of $9.03 fall short of expectations, but the number also represented a year-over-year decline of 7%. Aside from a tough macro climate that has impacted the entire tech sector, Google's Q3 bottom line was hurt by a year-over-year decline of 15% in cost-per-click, which also shed 3% compared to the previous quarter.

Motorola Needs to Work

Disappointingly, Motorola continues to weigh on Google's performance by producing revenue of $2.6 billion, or 11% below consensus estimates of $2.94 billion. This is the same company that, upon its purchase, Google decided was worth a premium of 60% above its closing price -- making it Google's biggest acquisition in the company's brief history. Was it a mistake? At this point I think this is a question worth asking for many reasons.

For instance, the quarter showed meaningful erosion in Google's operating income. Although that metric grew to almost $4 billion, or 8.8%, it was much slower than the 24% gain generated in the same period of a year ago. Likewise, another appalling quarter from Motorola is likely to turn the analyst community negative on the company's management, which consequently can introduce pessimism in future estimates. The potential adverse effect on the stock will certainly be felt.

That Google has since entered plans to divest Motorola's home business unit has now introduced concerns as to whether or not paying also $13 billion for Motorola was worth it. This is the group which includes set-top boxes and home networking.

Google is expecting the sale of the unit to generate approximately $2 billion. The decisions comes after rounds of job cuts and other cost saving measures that failed to produce the bottom line impact that Google once enjoyed in terms of profits.

Moving Forward

When reports first surfaced of Google's Motorola acquisition, I doubted whether or not it would work. After all, what did Google know about hardware? The company wanted to be more like Apple and establish its own ecosystem with the hopes that its Android software would come together perfectly with the hardware. So far Google has gotten it half right since most of Android's dominance comes from partners such as Samsung and HTC.

Also the concern is not so much that Google is screwing up synergistic opportunities with Motorola, it is that competition is not sitting idle and waiting for it to get it right. Early indicators are that Apple's iPhone 5 has been a smash hit.

Likewise, in addition to Microsoft's new Windows phone, there is also Nokia ( NOK), which is hoping that its Lumia 920, that is due out later this month can turn the company's mobile fortunes around. So it's not as if Google has time for trial and error with Motorola.

Bottom Line

While there is no doubt whatsoever that Google will overcome this, that Motorola reported $530 million in operating losses does little to inspire investor confidence that the acquisition was the right decision. Still, as disappointed as investors might be with what seems to be slow-moving progress, it's hard not to give Google the benefit of the doubt that it will eventually figure it out.

The good news is that Motorola presents Google with a potential stronghold in a smartphone market that can one day drive Android further. The only question is when? If nothing else, that Google now owns roughly 17,000 Motorola patents, this should allow the company several options and avenues from which to maneuver. But in the meantime, it can't escape questions as to whether or not this deal will ever work.

At the time of publication, the author was long AAPL and held no position in any of the other stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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