Google Q3 results, Edison view: “Slowing growth does not make the shares unattractive.”

Embedded editor Chris A. Ciufo writes: the following analysis of Google’s recent financial results by Edison Investment Research is instructive to the embedded market. Why? Consumers are shifting their “Googling” habits from desktops to small screens (tablets, smartphones, Intel 2-in-1s, etc) and the mobile market positively affects embedded as it catalyzes components and infrastructure. Additionally, we believe the IoT–from which embedded also strongly benefits–will play a role in Google’s future. Afterall, their purchase of Nest home automation was only the first salvo in Google’s potential role in monetizing the IoT.

Richard Windsor, analyst at Edison Investment Research, said:

“Google reported slightly disappointing results as growth from its core advertising business in fixed Internet slowed a bit more quickly than expected.

Video, multi-screen and mobile continue to be the strongest growth areas with desktop and display lagging behind. Google is investing heavily in R&D as most of 3,000 recruits during the quarter were engineers. This has been partially offset by a fall in the GNA spend as a % sales which is good news as I have long held the view that Google grossly overspends on GNA.

This has resulted in slightly lower operating margins which was compounded by a higher tax rate to give the EPS disappointment observed. There is bad news for Lenovo in these figures (reports Q2 14E on 7th November) as losses at Motorola Mobility look to have ballooned again.

Losses from discontinued operations increased to $185m compared to losses of just $68m in Q2. In the absence of the 10-Q filing, it is not possible to see exactly how much of the loss is coming from Motorola, but it is clear that profitability has nose-dived once again. This will increase pressure on Lenovo which is taking on the loss making division for $2bn and does not have the financial flexibility to endure ongoing losses.

For Google, this is a rounding error that no one really notices and consequently it has no impact on the company going forward. In this vein, the combination of mobile and video should keep the company growing nicely and I expect a solid end to 2014E.

At 17.4x 2015E and 16.1x 2016E PER (close 16th Oct), Google remains attractively valued and remains one of my top places to look when considering investments in the ecosystem.”

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