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GOOG – Google Soars After Earnings, But Ad Sales Still at Risk

goog stock google logoGoogle (GOOG) just reported Q3 earnings, and the stock is up double-digits today as a result.

So much for fears about Google stock suffering amid further ad softness.

But while Google earnings beat both the top and bottom line thanks to a push into mobile, some of the same risks to its core advertising business remain.

And investors bidding up the stock today should take a hard look at the earnings details before simply reacting to the headline earnings and ad sales.

GOOG Still Faces Cost-Per-Click Trouble

The much-watched “cost-per-click” metric that drives Google ad sales continued its downward spiral in the third quarter. Google earnings showed CPC numbers dropped 8% compared with last year and 4% quarter-over-quarter. Not good.

What closed the gap, then, was the fact that GOOG made up for soft margins with greatly increased volume.

Now, I advised not to give up on GOOG after July earnings so I’m hardly bearish on the stock. However, it’s crucial to remember that more than 85% of total revenue right now comes from the advertising business. That includes Google ads supplied through third party sites through its network, as well as display ads it can serve on its own network including search results and YouTube videos.

I remain convinced that the scale of GOOG, coupled with ambitious plans to grow its business in hardware and other areas, will lift the stock.

However, it’s undeniable that the pressure on ad sales presents a short-term risk. Remember, revenues continue to grow much faster than profits and even a company like Google with its massive reach can’t make up for lost margins with volume forever.

Long-term, I have faith that Google stock is a buy as it transitions into mobile — and bigger picture, transitions even away from advertising altogether.

But in the short term, it’s worth noting that the risk to the existing Google ad sales model haven’t exactly gone away. It’s just that this quarter, GOOG offset the margins with more volume.

This, of course, is hardly just a Google earnings issue. Yahoo (YHOO), Facebook (FB) and AOL (AOL), among other web publishers, are facing the same deflationary pressures in their ad sales. In fact, Yahoo just showed a dip in revenue and disappointing guidance in its own earnings thanks to soft ad sales.

So rather than think GOOG is somehow different just because it beat on the top and the bottom line after earnings, investors should remember that the tech stock is suffering the same secular pressures as an Internet advertiser.

That doesn’t negate the bullish case for this technology giant if the trend bottoms, or if GOOG can continue to diversify its revenue into projects such as Motorola hardware.

But it’s worth remembering that just because Google posted strong earnings, ad pressures remain. Anyone who looks closely at the cost-per-click ad sales details in this report will easily see as much.

Related Reading on Google Earnings

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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