Google: Good or Bad Buy Right Now?

Now that the big hullabaloo over Google's (Nasdaq:GOOG) premature third quarter earnings release Thursday is out of the way we can all exhale and focus on what the results mean for investors. CEO Larry Page believes it had a strong quarter and is excited about the future. Others aren't so sure. So the question I'm here to answer is whether Google is a good or bad investment based on the news.

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The biggest concern is Motorola. Google paid $12.5 billion to buy the smartphone manufacturer and it delivered an operating loss (OL) of $527 million before stock-based compensation and restructuring charges. Excluding those two items, the operating loss was $151 million. Before the company can expect to see a return on its investment, it will have to figure out how to cut more fat from its operations. Shedding 2,865 jobs in the quarter is a start but it will need to do more. It can't expect Verizon (NYSE:VZ) to support the Droid Razr indefinitely. It will have to come up with some additional products cost effectively. As of now, analysts consider Motorola a money pit and given the mobile unit's sales (its home division makes cable set-top boxes) in the quarter dropped 26% year-over-year to $1.78 billion, it's easy to see why.

Everyone and his dog has been all over Facebook (Nasdaq:FB) for its mobile problem. BGC Partners analyst Colin Gillis believes Google has a similar problem. It's had four straight quarters of declining costs-per-click after delivering eight consecutive increases, a sure sign that advertisers aren't convinced about mobile ads just yet. Further, Gillis feels that the mobile issue is baked into its stock price but not so with Google. Eventually, unless it's able to pull itself out of this downward trend, investors are going to register their displeasure. In the long term, however, mobile advertising is here to stay. Google and Facebook should be just fine.

The final worry for investors: Google's non-GAAP operating income slowed considerably in the third quarter, increasing by just 8.8% to $3.95 billion. Last year's year-over-year gain was 23.9% from $2.93 billion in Q3 2010 to $3.63 billion in Q3 2011. If the markets decide to saddle Google with slower growth projections because of its lackluster performance, as well as Motorola's downright abysmal showing, the shares will most definitely take a tumble.

SEE: Zooming In On Net Operating Income

Things to Applaud

At the top of the list would have to be the $8 billion in mobile business it will generate in 2012. CFO Patrick Pichette insisted in the conference call that ads make up for a bulk of the revenue. Let's assume that majority means 70% for argument's sake; this translates into mobile ad revenue growth of more than 100% in 2012. With mobile being the future, it's good to see Google building the business. Unfortunately, without an idea of the profit margins, it's a positive but not a home run.

According to Piper Jaffrey analyst Gene Munster, Google likely sold between 800,000 and 1 million Nexus 7 tablets in the third quarter. It might not sound like a lot compared to Apple (Nasdaq:AAPL) but it's the best-selling Android tablet at Carphone Warehouse, one of the biggest electronics retailers in the United Kingdom. Estimates project unit sales in 2012 as high as six million so a strong Christmas would likely heat up the competition for tablet buyers. According to Pew Research, 22% of adults in the United States own a tablet and 44% own a smartphone. Half of the adults in the U.S. own at least one of these devices. Most importantly, Android tablet owners now represent 48% of the tablet market in the U.S. With Google's deep pockets, the tablet market should be conquerable.

Christian Thwaites, CEO of Vermont-based Sentinel Investments appeared on Bloomberg TV Thursday and mentioned that he thought Google was looking very attractive at this point and wasn't at all worried about the Q3 report. Thwaites was most enthralled by Google's cash flow, which grew ever so slightly to $4.0 billion in the quarter, despite a 20% decline in net income. This, combined with $45.7 billion in cash, makes Google awfully tempting to own.

Google appears to be having trouble digesting Motorola; it's a process that could continue for another year or more, which is clearly troubling for investors. Having said that, I see Google and Apple in a dogfight to hit $1,000 a share. I don't know when, but it will happen for both soon enough. Despite the uneven quarter, I'm inclined to view Google as a good buy at this time.

At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.