Google Earnings Impacted by Nest: What Wall Street's Saying

Updated from 12:17 p.m. to include thoughts from JPMorgan analyst.

NEW YORK (TheStreet) -- First-quarter earnings for Google (GOOG) missed Wall Street estimates, but pending any further hiccups it looks like the gravy train is continuing, at least for now.

Mountain View, Calif.-based Google (GOOGL) reported first-quarter results that missed analysts' estimates, as the company earned $6.27 a share on a non-GAAP basis, generating $12.19 billion in revenue, excluding traffic acquisition costs (TAC). Google site revenue of $10.47 billion rose 21% from last year's first quarter and accounted for 68% of Google's revenue. Including TAC, Google generated $15.45 billion in revenue for the quarter.

Analysts surveyed by Thomson Reuters were expecting Google to earn $6.40 a share on $15.52 billion in revenue, including TAC. Analysts surveyed by Estimize were expecting earnings of $6.19 a share on $12.87 billion in sales, excluding TAC.

Google, which split its stock during the quarter to now include both Class A shares and Class C shares, was trading lower in Thursday trading. GOOG shares were falling 2.8% to $540.97, while GOOGL was off 2.9% to $547.31.

The company noted cost-per-click (CPC), a key advertising metric, remained flat from the previous quarter, as it appears Google's initiative to bundle advertising buying on various platforms, known as enhanced campaigns, is working. However, CPCs still fell 9% year over year. Paid clicks, which include clicks related to ads served on Google sites and the sites of its network members, increased approximately 26% year over year, but fell 1% sequentially.

On the earnings call, Nikesh Arora, Google's senior vice president and chief business officer, noted CPCs will start to move higher as more advertisers begin to understand mobile devices. He noted that in the medium to long term, mobile ad pricing will be better than desktop because more will be known about the user and the context of what they're doing for what they're searching. Additionally, Google is working to making its payment enabling system easier, which should cause CPCs to rise. But getting advertisers to focus on the mobile side as opposed to desktop is a much harder initiative and will take some time.

Chief Financial Officer Patrick Pichette noted this was a particularly expense-heavy quarter, led in large part by the Nest acquisition, as Google spent more than $3 billion for the smart thermostat and fire alarm company. That impacted somewhat the company's earnings.

"The one-time M&A deal costs are largely stemming from the Nest deal, which was a pretty large transaction for us this quarter," Pichette said on the call. "But I think that the best way to describe it is that our expenses in Q1, they are completely in line with our objectives if you'd kind of take apart these two items, so that's how I would describe it."

Canaccord Genuity analyst Michael Graham (Buy, $700 PT GOOG)

"Amidst an Internet sector correction that has been driven mostly by sentiment and valuation, Google reported solid Q1 results (especially for core revenue/margins) that should lend some stability to the stock and the sector. We believe the key number is 21% for Web sites revenue growth, which provides the foundation for our BUY thesis: 1) ~20% revenue growth with slight operating leverage leads to >20% EPS growth for a few years, with a bigger acceleration this year; 2) undemanding valuation; 3) sale of MMI creates margin expansion that should help the stock screen well; still largely-undiscounted potential from YouTube, mobile ad pricing reaching (higher) maturity, and other adjacent businesses."

Jefferies analyst Brian Pitz (Buy, $700 PT GOOG)

"We are buyers on the dip given the EPS miss was attributed primarily to discrete one-time expenses. Solid top-line trends reflected continued positive contributions from a range of products including PLAs / Search, YouTube, and Android / Google Play. Google now trades at 14x (ex-cash) our new '15 EPS estimate; we think this is a reasonable multiple given our belief Google remains best positioned against a number of secular growth trends."

Cantor Fitzgerald analyst Youssef Squali (Buy, $630 PT GOOG)

"We're maintaining a BUY rating and adjusting our PT to $630 from $650, following 1Q:14 results, which came in 1% and 2% shy on the top and bottom lines, respectively. While the business is arguably becoming more capital intensive, Google continues to gain market share with gross revenue growing at +21% (ex. FX) and EBITDA margins of 50%. We believe that Google remains one of the best plays on global online advertising growth, and at 12.5x EV/EBITDA/20.9x P/E on our FY:14 estimates, we continue to find the stock compelling."

Credit Suisse analyst Stephen Ju (Outperform, $735 PT GOOGL)

"Despite the mixed set of financial results, we believe the most important takeaways from the 1Q14 report was the positive inflection in the CPC decline rate, which was -9% YOY (vs -11% in 4Q13) on what were tougher comps coupled with continued strong volume growth. We believe this is one of the first fledgling signs of the benefits Google is set to realize from the pricing convergence between mobile and desktop on the back of products such as Enhanced Campaigns, App Indexing, as well as tools to help advertisers make cross-device attributions. As such our investment thesis remains unchanged and we reiterate our Outperform rating."

UBS analyst Eric Sheridan (Buy, $665 PT GOOG)

"Into the earnings print, most investors were looking for strong/stable revenue growth & stable margin trends. Google's report delivered on revenue expectations but fell short on margins. Investors were left confused about the impact of one-time and recurring opex from recent M&A activity (notably the Nest transaction that closed on Feb 7th). Based on our calculations, the one-time items likely caused a 50-100bps drag on Google's operating margins (a normalized result slightly below Street ests). Despite this upward pressure on opex and capex, we think investors will continue to view Google as a solid risk/reward at current levels. In our view, Google is the best positioned stock in our coverage universe for exposure to a full range of secular growth trends at a very reasonable valuation on both EV/EBITDA and P/E on our 2015 estimates."

Deutsche Bank analyst Ross Sandler (Buy, $625 PT GOOG)

"Google's 1Q results were broadly in-line with consensus, with net revenue of $12.2B (-2% q/q) and core EBITDA of $6.01B. The tone of the conference call was upbeat and consistent, highlighting the solid growth in Google Websites (+21% y/y), Licensing/Other (+48% y/y), and ROW (+30% y/y), with laggards UK (+11% y/y) and Network Sites (+4% y/y). Overall, we continue to view Google as a top idea, and a safe-haven during times of high volatility in consumer Internet. Maintain Buy."

JPMorgan analyst Doug Anmuth (Overweight, $645 PT GOOG)

"Google's 1Q results came in below our and Street estimates due to lower than expected Network and Other segment revenue and higher opex. However, we think fundamental trends in the business remain strong as Google Websites grew 21% Y/Y and higher expenses were due primarily to the recent acquisition of Nest and legal costs."

-- Written by Chris Ciaccia in New York

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