Google: Still Opportunities Ahead

by Jon Markman

Google (GOOGL) shares are finally recovering after announcing third-quarter earnings last week that were shy of expectations. The search engine giant said revenue totaled $16.52 billion, up 20 percent from a year earlier, but well below the $16.58 billion expected by analysts. The biggest shortfall was in paid clicks, and the biggest surprise was higher expenses as the company kept hiring like crazy — it's up to 51,560 employees now! — and spending on data centers. The pullback has brought Google shares right back to the top of the gap that was created exactly one year ago following its third-quarter 2013 earnings. This is an ideal place to pick up shares, if you have been thinking about it for a while, as there is a natural stop just below the blue line in the chart above. Why would the shares improve from here? Google is improving on all fronts, and it was really its expense line that got out of whack. Companies like Google and Amazon.com (AMZN) that have a clear view of their path forward tend to invest heavily in personnel and plants when they determine it is prudent for their long-term vision, even if it causes short-term pain to earnings expectations. There are many bright opportunities on the horizon for Google, particularly in mobile communications where it has done a great job of gaining market share but not such a great job in profitability. That will change. Meanwhile, last week you may have missed the news amid all the market turmoil that Google introduced its new flagship mobile phone, the Nexus 6. It looked great — certainly an iPhone 6 Plus beater for those who care about more than fitting in. I'm going to order one and will let you know how it is. The specs are all better than the iPhone 6 Plus, including screen clarity, size, battery life, speed and waterproofness, and the best thing is you can "fight the man" by thinking different than the Apple crowd. Meanwhile, Apple (AAPL) announced new iPads on Thursday and the market let out a big, collective yawn as the tablets did not include any major new innovations in terms of the software. It's cool that they made the new iPad Air 2 thinner and a touch lighter and faster, but the announcement kind of reminded me of the latter stages of the iPod, when the company would just announce more memory and new colors. It also reminded me of the latter days of the time when PCs were the cool electronics, when it suddenly just didn't seem interesting how big the new Dell hard drive was, or if the Intel chip clock speed went up a touch, or if it came with a 21-inch screen. Yes, the iPad has settled into middle age after just four years in our lives. I still use mine several times a day to consume media and the web, and do the New York Times crossword puzzle — it's certainly one of my all-time favorite pieces of technology — but I hear from neighbors and others that they are not using their iPads much anymore, preferring their laptops or phones. This is probably why Apple has decided not to put a lot of time and effort into developing their technology. We will learn more about its plans after we have a chance to study its third-quarter earnings announcement late Monday. * * You may have wondered why the market rallied on Thursday and Friday after such weak sauce on Monday-Wednesday last week. The main catalyst was comments from the St. Louis Federal Reserve Bank chief, James Bullard, aimed at suggesting that the central bank should consider delaying its exit from quantitative easing due to declining inflation expectations. Investors acted as if they had just inhaled a bag of verbal methamphetamine after those remarks, showing once again how very, very sad they are about the Fed ending its money-printing campaign. The comments lifted stocks to their highs for the day, and they have kept on going. Speaking to Bloomberg TV, Bullard cited a recent drop in inflation expectations and said that maintaining quantitative easing would keep policy options open going forward. Recall that earlier in the week the San Francisco Fed chief, John Williams, said he would be open to additional QE if inflation trends fall significantly short of the Fed's target. So that's two now. Elsewhere last week, the Minneapolis Fed chief, Narayana Kocherlakota, who I nominate as the banker with the coolest name, repeated his view that it would be inappropriate to rate hikes any time in 2015. Matched against those doves this week has been the Dallas Fed chief, Richard Fisher, who said yesterday that it is too premature to consider more QE. So put all that together and it's clear that the Fed is laying the groundwork for more QE, softly telling the market to prepare for that should it come. Of course now there will be disappointment if there is no movement on that score at the next meeting. Recall that the Fed's inflation target is 2 percent. Bloomberg anchors noted that Fed Funds futures showed only a 27 percent probability that the Fed's benchmark interest rate will be 0.75 percent or higher by the end of 2015. (That would be a very low level, judged against monetary history.) And recall that Fed officials' Summary of Economic Projections forecasts — the famous "dot plot" — showed a median estimate of a 1.375 percent rate by the end of next year, which now seems way too high.