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Don’t Give Up on GOOG After Google Earnings

Google (GOOG) stock is slumping after reporting higher profits and sales but missing Wall Street forecasts. But despite the reaction by traders, Google earnings were pretty darn good — and long-term, there’s a lot to like about GOOG stock.

The online advertising king and jack of all Internet trades reported Q2 profits of $9.71 billion ($9.54 a share) vs. $8.54 billion ($8.42 per share) in the year-ago period. Those Google earnings are nothing to sneeze at, considering the 13% jump in profits for a company that’s already making money hand over fist. Revenue was up over 15% from $9.61 billion to $11.1 billion.

But Wall Street was looking for profits of $10.80 per share and revenue of $11.37 billion on average, and those gains just weren’t enough.

Furthermore, the old “cost-per-click” metric that has haunted digital media giants like Google and Yahoo (YHOO) lately reared its ugly head. CPCs are the prices Google and others can command for online advertising, and Google earnings revealed a 6% year-over-year decline in Q2.

Throw in a plan to “continue to make significant capital expenditures,” and some investors are worried that weaker margins coupled with free-spending Google projects could squeeze profits even more in the coming months.

But Google earnings aren’t the end of the world, and investors should keep some perspective.

For starters, GOOG stock has been on a tear in the past year, going from $560 or so last summer to a recent high of $928 for a better-than-60% gain before this rollback.

A little consolidation was probably in order anyway, and anyone who has watched the stock for a while knows that earnings typically are full of fireworks. In the past few quarters, Google earnings have sparked a rally, however, so it didn’t seem to be a that big of a deal as long as the tape was headed higher.

And while online advertising pressures are significant right now, it’s worth noting that Google continues to expand its product line dramatically. In Google’s 2012 annual report, it noted “other revenues” contributed $829 million in the last fiscal year. Not bad for a bunch of pet projects.

Why wouldn’t you encourage spending in pursuit of new revenue streams like these, particularly when the legacy ad business is under pressure?

That’s exactly what Google is doing. And it’s not like GOOG is just throwing stuff at the wall, either. Most recently, we’ve seen a focus on subscription-based YouTube channels to capitalize on the platform’s 1 billion-plus users and perhaps challenge Netflix (NFLX) and Prime from Amazon (AMZN) as a viable streaming video service. Coupled with a plan to offer “Internet cable,” this could be a huge opportunity for Google.

There’s also Google’s line of slick Nexus smartphones and tablets that will get it into the hardware game, hopefully giving Apple (AAPL) a run for its money but at the very least becoming a viable alternative to also-ran offerings like tablets from Hewlett-Packard (HPQ) or the ever-dwindling BlackBerry (BBRY) smartphone line. Coupled with its dominant Android OS for smartphones, this could be a massive area of potential in the years ahead.

Yes, the ambitious Google Fiber Internet service project, quirky Google Glass technology and dozens of other experiments prove that the Mountain View tech giant still likes to try weird and ambitious things that might never hit the bottom line. And yes, gross margins in some of these other efforts haven’t been robust enough to replace challenges in the core advertising business.

But there are tangible areas of success at Google and big areas of future potential going forward.

With a forward P/E of about 17 right now — right on par with the forward P/E of the entire Nasdaq-100 — Google seems fairly valued right now.

And with Google earnings sparking a brief selloff, you could be looking at an opportunity to get in on a dip and ride a multiyear run for this tech giant.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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