Google Earnings: EPS is falling and Growth is slowing

Mass media and Google would like you to belive that everything is just going fine, growth is strong and valuation of a Search Engine is justified at the market cap of 152 billion dollars. After quick play with Google's own numbers you will be woundering why is Eric Schmidt is "... ecstatic about our financial results this past quarter" particularly if "...I would like to remind everybody as I have each year at this time, that we are about to enter our seasonally slower summer growth period, and make sure you factor that in when thinking about how our business will grow." So what is so "ecstatic"? Maybe EPS at 3.18 which is below EPS of 3.29 in Q4 2006. It is decline in EPS of 3% and Google is facing its seasonally slowest quaters ahead. I found it rather disturbing that company with bubble valuation of Price/Sales=12.6, Price/Book=8.2, Price/Earnings=43.2 and Market cap to free cash flow ratio of 83 (!) has slowing revenue growth rate -20% Y/Y, Google's own sites have slowing growth rate-22% Y/Y and its network web sites revenue growth is falling even faster - 24% Y/Y. It is still one trick pony with licencing and other revenue at just one percent of total revenue and even at this low level rate of growth is slowing Q/Q. Portion of Google own sites is rising in total revenue and Networks share is falling with TAC rising. It is reflecting rising competition and distribution deals which are eating margins. George Reyes at the conference call sad: "The answer is that we're doing a lot more deals and the deals are, in fact, carrying a disproportionate amount of TAC. So, at the end of the day and I think I suggested that in my earlier comments, TAC as a percentage of revenue is likely to increase given the deals that we're doing these days." Net income falls in Q1 2007 to 1,002,162 from 1,030,716 in Q4 2006 ('000USD) showing declining net Income margin from 32% to 27%. Sales per head are stagnating at low end in 2006 range at 299.4 ('000USD) All this analyses is based on GAAP figures presented by Google and accounting for all relating expenses including stock based compensation as it should be done according to Warren Buffet which is admired by Google founders. Regarding the latest corporate development Mark Mahaney - Citigroup asked: "... Secondly, a broader question just on display advertising. Larry and Sergey, when you started search, you clearly had something different in mind, something more targeted than the normal advertising that was out there. What generally changed in your thinking that made you think either that the display advertising market was big enough or that you had a targetable solution that was good enough to make you want to make the moves you made, like buy DoubleClick?" Sergey Brin replied "...Advertisers, in many cases, don't have all the metrics information they need to decide which ads to run where. So we have seen good success with that, and we think we can expand that more to broader kinds of media, not just static images and what not. Of course, with this intent to acquire DoubleClick, we think we can make more advertisers much more efficient." With so flexible motto privacy advocats will be alarmed. Deal in general seams to be based on "overreaction" to threat of losing DoubleClick to competitors which resulted in a price tag of 3.1 billion cash offer from Google and I would like to run a few parallels. It is estimated that Double click had roughly 150 million in revenue last year as reported by Wall Street Journal. So Google is paying 20.7 time sales of the company. Google itself is valued at the moment as Price/Sales=12.6, Yahoo! P/S=5.7, MSFT P/S=6.0, so Google is paying premium of 64% for DoubleClick above its own exaggerated valuation which is 121% higher then nearest competitor. By making payment of 3.1 billion dollars and buying company with 150 million dollars in revenue Google will lose interest income in the amount of 161.2 million dollars per year assuming investing in money market funds at 5.2% p.a. Most importantly Google is spending almost 30% of available at the year end 11.2 billion dollars. With flat free cash flow (1.678 billion dollars in 2006 Vs 1.621 billion dollars in 2005, operational cash flow actually decreased by 9% in Q4 2006 from Q3 to 0.911 billion dollars) and still pending lawsuit of 1.0 billion dollars there is not so much money left to fight competition war against Yahoo!, Microsoft and Old Media Guys. With effect of "law of big numbers" already shown in recent decline in EPS, slowing growth rate will become apparent even to most devoted Google followers, inability of "technological" company to create any new products and monetise already made investment in YouTube should ring alarm bells for any investor.