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Mixed Earnings from Google and Yahoo Put Internet ETFs in Focus

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Some of the tech giants such as Google ((GOOGL - Free Report) ), Yahoo (), IBM and Intel (INTC) released their second quarter earnings results this past week. Among them, Google's was especially in focus, as the company reported better-than-expected sales, though Google missed on earnings by a slender margin.
Investors, however, took note of the upbeat revenue numbers, as Goggle shares increased nearly 1% to $579.4 in after market trading, after closing 1.5% lower. The company also announced that its longtime business chief, Nikesh Arora, will be quitting the company to take a top role in Japanese technology conglomerate Softbank.
Yahoo, however, has been slumping after it reported its numbers on July 15, having fallen 7% in just two trading days. It just met earnings estimates on lower-than-expected revenues (read: Technology ETFs: Pain or Gain Ahead?).
Google Earnings in Details
Earnings per share came in at $5.09, missing the Zacks Consensus Estimate of $5.16. However, revenues jumped 22% year over year to nearly $16 billion, easily beating the Zacks consensus expected quarterly revenues of $12.4 billion.
Slumping advertising prices, on the back of rising expenses, are considered the main culprits for the earnings miss. The company’s foray into new technological frontiers such as Internet-connected eyewear, driverless cars and robots are leading to its rising costs. Expenses have also spiraled as Google hires more workers and promotes products and ventures.
Google’s average cost per click fell 6% year over year, marking its 11th consecutive quarter of erosion, per a Los Angeles Times article. The transition from desktops-to-mobiles is believed to be the main factor for this and it is a hurdle for revenue growth. Increasing use of smartphones is reducing the number of people clicking on ads that appear alongside search results and other Web content.
Yahoo Earnings in Detail
Yahoo’s Q2 earnings came in at 30 cents per share, down both sequentially and year over year but in line with the Zacks Consensus Estimate. Revenues fell 4.3% sequentially and 4.5% year over year to $1.04 billion, missing our estimate of $1.09 billion (read: Top ETF Picks for Q2 Earnings Season).
While the company’s core search ad revenues (ex TAC) improved by 6% year over year, its display ad revenues declined 6.9% from the comparable quarter of 2013. Moreover, Yahoo continued to reap benefits from its equity stake in Alibaba and Yahoo Japan, leading to strong other income.
Following the IPO, Alibaba’s earnings will no longer be a part of other income which will negatively impact its results, particularly since the Yahoo Japan portion is nowhere near as strong. However, Yahoo will be selling less than the 40% it had previously agreed upon, which is expected to lend some support. Further, management intends to distribute half of the proceeds, while using the rest for organic as well as inorganic growth.
For the third quarter, Yahoo expects revenues on a GAAP basis to be $1.06–1.10 billion and on an ex-TAC (Traffic acquisition cost) basis to be $1.02–1.06 billion (read: Time to Bargain Hunt with This Technology ETF?).
Internet ETFs in Focus
With the results of these two tech giants out, Internet ETFs having sizable exposure to Google and Yahoo are in focus in the coming days.
Investors should keep a close watch on the below mentioned ETFs. The rise in Google’s share price in extended trading might lead these funds to trade higher.
First Trust Dow Jones Internet Index Fund ((FDN - Free Report) )
This is one of the most popular and active ETFs in the broad tech space with an AUM of over $1.7 billion and average daily volume of more than 500,000 shares. The fund holds a small basket of 42 stocks charging investors 57 basis points annually.
Both Google and Yahoo rank among the top 10 holdings, with Google having a total 10% allocation (Class A and Class C) and Yahoo 1.3% exposure. However, Amazon occupies the top spot here, followed by Facebook.
The ETF has lost 3.3% in the year-to-date frame and is down 1% in the past one week (see all Technology ETFs here).
Nasdaq Internet Portfolio ((PNQI - Free Report) )
PNQI tracks the NASDAQ Internet Index to provide exposure to the largest and most liquid U.S.-listed companies engaged in Internet-related businesses. The fund manages an asset base of $322.6 million and trades with moderate volumes of roughly 40,000 shares a day.
Google has a roughly 15% allocation in the fund, including Class C and Class A shares with Yahoo having a 4% exposure. Apart from the Tech sector, the fund has 28% in Consumer Cyclical companies and low single-digit exposure to Communication, Real Estate and Industrials sectors.
PNQI has also performed on the same lines as FDN, but is slightly expensive with 60 basis points as expenses.
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