Google Inc: Cost Per Click Matters More Than Click-Through

Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG)’s earnings results disappointed last week, or more specifically, one particular metric disappointed. Growth in paid clicks decelerated in the quarter, leaving investors with worries about Google’s near term growth.

However, BGC analysts believe Wall Street is focusing on the wrong metric. They think growth in cost per click is more important than the deceleration in paid click growth.

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Growth in Google’s core business slows

In a report dated Oct. 17, 2014, analyst Colin Gillis noted that Google’s core ad business saw a 20% year over year growth rate. However, that’s a deceleration from the June quarter’s 23.3% growth rate. The biggest issue for investors, however, was the big deceleration in paid clicks, which fell to a 17% growth rate, compared to last year’s 26% and the previous year’s 25% growth rate.

The analyst said investors should look on the bright side though, noting that the decline in cost per click was smaller than expected. Cost per click fell only 2%, so Gillis believes Google was experimenting with its algorithms to improve cost per click—but at the expense of paid clicks. He believes Google will be able to improve both of these key metrics next year, with both of them turning positive in the September quarter of next year.

Google’s spending habits

He also notes that this is the fourth consecutive quarter in which Google spent more than Wall Street expected The search giant has been aggressively hiring and spending more and more on research and development. R&D spending increased by more than $400 million quarter over quarter, and expenses are up by 21.2% year over year, which means that the company’s expenses are growing faster than its revenue.

In spite of the aggressive spending, the BGC analyst is positive on Google’s future growth opportunities. For example, he notes that the Google Play store is still driving results in the search giant’s Other category, which grew by a 49.7% rate year over year. The segment made up 11.1% of Google’s total revenue.

Gillis continues to rate Google as a Buy with a $650 price target.