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ETFs in Focus on Google Earnings Miss and Soaring Costs

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Continuing  with its recent  trend, Internet search king Google, Inc. (GOOGL) has yet again disappointed the Street with its dismal fourth quarter results. The company has missed expectations on both revenues and earnings, with Q4 being the fifth straight quarter of an earnings per share (EPS) miss.

The disappointing results led the company’s shares to shed approximately 2% in the late market. However, encouraging statements by the company’s CFO Patrick Pichette lifted investor sentiment leading Google’s shares to reverse the losses and post a 2% gain to $520.50 in extended market trading.

The CFO assured investors that the company plans to spend in a “prudent manner”. Some of the company’s earlier and more ambitious initiatives such as self-driving cars and in Wifi balloons for bringing the Internet to remote areas of the world have been quite disappointing for investors (read: 3 Apple ETFs for Juicy Returns on Record Earnings).

Google’s Q3 Earnings in Details

The company reported EPS of $5.50 (accounting for traffic acquisition costs (TAC)), roughly 6% below the Zacks Consensus Estimate of $5.86. Though revenues (minus traffic acquisition costs) were up 17% year over year to $14.48 billion, it missed our estimates of $14.84 billion.
Google’s paid clicks rose 14% year over year during the reported quarter. However, the revenue

Google collects from each click (i.e. cost per click) fell 3% from the same period a year ago.
Google’s CFO blamed a strong U.S. dollar for the lower-than-expected growth. Moreover, the company’s main search advertising business is seeing a declining trend as more consumers access its online services on mobile devices, where rates are typically lower. Google is facing stiff competition from Facebook in the mobile advertising market with its share in this business gradually shrinking (read: ETFs in Focus on Facebook Earnings Beat & Rising Cost).

Soaring operating costs are also taking a toll on the company’s earnings. The company is spending heavily on research and development to ramp up growth and has added roughly 5,000 employees over the past six months.

ETFs in Focus

Despite the earnings miss, positive comments by the company’s CFO led Google’s shares to post gains in the extended trading hours. The stock currently has a Zacks Rank #3 (Hold) and a solid Zacks Industry Rank in the top 42%. 

Hence, we have highlighted three of the biggest holders of Google stock in ETF form. Investors who believe Google’s troubles are just beginning should stay away from these tech products while those who are cautiously optimistic might rather cycle into these funds.

PowerShares NASDAQ Internet Portfolio (PNQI)

This fund tracks the PowerShares NASDAQ Internet Portfolio to provide exposure to the largest and most liquid U.S.-listed companies engaged in Internet-related businesses. In total, the fund holds 94 stocks, with Google taking the third and the fourth spots (Class A and Class C shares), having a combined allocation of roughly 16%.

In terms of industry exposure, Internet software & services makes up for a little less than three-fourths share in the basket, followed by Internet & catalog retail. The fund manages an asset base of $247.4 million and trades with moderate volumes of roughly 40,000 shares a day. PNQI is down roughly 1.5% so far this year.

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 $2 billion and average daily volume of more than 290,000 shares. The fund holds a small basket of 41 stocks charging investors 57 basis points annually.

Google scores among the top 10 holdings having a total allocation of 10% (Class A and Class C). From a sector look, information technology accounts for about 70% of the portfolio while consumer discretionary makes up 23%. The product charges 57 basis points as expenses and has lost 2.3% in the year-to-date frame (read: Guide to Internet ETFs).

iShares Dow Jones US Technology ETF (IYW - Free Report)

IYW is also quite popular in the tech space with AUM of $4.4 billion while charging 43 bps in fees and expense. Moreover, the fund trades with good volumes of more than 600,000 shares a day (see: all the Technology ETFs here).

The product tracks the Dow Jones US Technology Index, giving investors exposure to a basket of 142 stocks. Google scores among the top 10 holdings having a little less than 10% allocation (Class A and Class C). IYM has lost 2.3% so far this year.

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