Google: An Algorithmic Analysis
Source: Sharon Gaudin

Figure 1. Source: Quartz

Google (GOOG) is by far the most popular search engine for users in the US and most of the world. The tech giant’s most recent earnings report, released January 29th, fell short of expectations. The disappointing revenue and earnings per share figures came at a time when there was general pessimism about the future of the company. The pessimism was driven by the overall shift of the market to mobile, where ads are cheaper and where users prefer to search through apps over browser-based engines.

The most concerning aspect of Google’s future outlook was its declining cost-per-click rates. For several quarters in a row, CPC rates have fallen as consumers shift to mobile devices. Last quarter saw a further 8% drop in average CPC rates on Google sites, which is concerning, but the company did see growth in paid clicks of 14%, including 25% on sites it owned and operated.


Results Not Bad As They Look

With the poor earnings results and general doubt hovering over the company, one would have expected the stock price to fall, maybe even drastically, but this has not been the case. Instead, the stock price has risen almost five percent since the earnings call, as executives were able to calm investors after the report was released and analysts were able to examine the results more closely.

For one, its owned and operated “Google Sites” advertising business, the company’s most important business, actually performed pretty well. The company saw 18% growth in its core business, which is extremely impressive considering its massive size. Management emphasized that the core was not as bad as it seemed at first glance, noting that the quarter’s numbers were noisy.

Management also highlighted mobile search on the call multiple times. Consumers’ shift to mobile can be turned into a strength. Google is developing new and improved tools for mobile partners to measure results. The company will be able to better utilize its abundance of online user data to enhance its targeting capabilities, much like Facebook (FB) did in the past.

Future Opportunities For Growth

After first offering Google Apps 10 years ago, Google had success in 2014 convincing large enterprises to use its tools such as email, word processing, and cloud computing. The company now plans to grab 80% of Microsoft’s users using a fairly basic plan. Google will not focus on the roughly 10% of features, such as Excel, that are required by power users. Instead, it will focus on what consumers actually need. According to Google’s analysis, most people are reading and doing very light editing, and don’t need to pay for Excel or Office.

A big part of the strategy will be not convincing people to switch from Microsoft Office, but to use their service in addition to the Office licenses they already have. The goal is users will eventually realize that they don’t need Microsoft Office, and Google Apps will allow them to only pay for what they use. This could ultimately save companies a lot of money. The Google cloud will also help mobile workers, which will eventually replace PCs altogether for a lot of employees. Apps built on the cloud for mobile will be able to assist users while they work.

Besides Google’s goal of taking away Microsoft’s Office business, the company is also adding a feature where online searches on health related topics would display relevant medical details on the search page. One in 20 Google searches currently are on health-related topics. Google worked with doctors to compile the data, which have been checked by its medical team and doctors at the Mayo Clinic for accuracy.

When a user searches for a disease or illness, the page will pull up details such as symptoms, treatments, age factor and whether the condition is contagious. Medical advice is increasingly going virtual, and Google’s Vice President of Search, Amit Singhal, claimed that this was just the start for the company’s plans in this market.

Algorithmic Forecast For Google During Earnings Report

I Know First supplies financial services, mainly through stock forecasts via their predictive algorithm. The algorithm incorporates a 15-year database, and utilizes it to predict the flow of money across 2000 markets. The algorithm has more data to forecast within the long term and, naturally, outputs a more accurate predication in that time frame. Having said that, intraday traders, along with short-term players, will also benefit by taking the algorithmic perspective into consideration.

The I Know First algorithm was able to correctly predict the behavior of Google’s stock around the time of the earnings report. Figure 2 is an I Know First algorithm prediction made on January 8th, 2015. The self-learning algorithm uses artificial inelegance, predictive models based on artificial neural networks, and genetic algorithms to predict money movements within various markets.

The algorithm produces a forecast with a signal and a predictability indicator. The signal is the number in the middle of the box. The predictability is the number at the bottom of the box. At the top, a specific asset is identified. This format is consistent across all predictions. The middle number is indicative of strength and direction, not a price target. The bottom number, the predictability, signifies a confidence level.

In this forecast, Google had a signal strength of 13.43 and a predictability indicator of 0.26 for the one-month time horizon. In accordance with the algorithm’s prediction, the stock price increase 5.97% over that time, during which the earnings report was released.



Figure 2

Algorithmic Forecast For 2015

Having demonstrated how I Know First’s algorithm was able to correctly predict the movement of Google’s stock price earlier in the article, it is worthwhile to see if the algorithm agrees with the bullish fundamental analysis of the company. Figure 3 includes the three-month and one-year forecasts for Google from February 10th, 2015. In both forecasts, Google has a positive signal, indicating the algorithm is bullish for the stock.

Figure 3

Conclusion

Even with its earnings report not meeting expectations, Google’s stock still improved because of Google management’s ability to calm investors. Upon closer examination, the earnings report was not nearly as bad as it appeared, and Google will be able to successfully transition to mobile following its rival Facebook’s strategy. With strong plays into Office and health care, Google is as strong as ever with ample room for growth, and is currently undervalued. Long investors would be wise to add this stock to their portfolio.