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."

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