Why Google shares fell despite 19 per cent growth in revenues

Mobile advertising concerns reflected in five per cent drop in share price

Shares in Google dropped a total of five per cent in after-hours trading on Wall Street yesterday, despite Q2 results that showed 19 per cent revenue growth.

In an earnings release yesterday Google revealed that its revenues climbed 19 per cent year-on-year. Reported revenues were $14.11bn (£9.3bn), compared with $11.8bn (£7.8bn) a year ago. The firm's net income rose to $3.23bn (2.1bn), or $9.54 a share, from $2.79bn in Q2 2012.

"Google had a great quarter" said Larry Page, CEO of Google. "The shift from one screen to multiple screens and mobility creates tremendous opportunity for Google. With more devices, more information, and more activity online than ever, the potential to improve people's lives even more is immense."

Google's share price has risen 27 per cent over the past year, so why the fall in share price yesterday?

"One of the reasons why people like Google is you can look forward and see what they're doing with Glass and laying fibre and driverless cars and Chrome, chasing after new revenue streams," analyst Colin Gillis of BGC Partners told the New York Times. "But those are still pretty far away. Google's core business is all about advertising and clicks, and the core business is absolutely maturing. Mobile ads are inexpensive yet overpriced because the conversion rates are so low."

Indeed, despite a meteoric rise in revenues in some parts of its business (combined revenues from Google Cloud Platform and Google Apps rose 195 per cent year on year to $200m, according to analysts, with similar growth rates expected this year), Google's results failed to meet analysts' expectations.

In spite of Page's words, like Facebook before it Google is struggling to maintain its core business - advertising revenues - as consumers move from PCs to mobile devices. Despite an increased number of clicks from mobile devices, the cost-per-click (CPC) of mobile ads has fallen in seven straight quarters, from a rate that is already well below that for standard web ads.

To counter this trend, in February the web giant announced will be mandatory for all advertisers using its AdWords programme to automatically include tablet ads in all campaigns. Smartphone ads will remain optional. This change comes into force next week, and is likely to raise the price of mobile ads, and thus Google's mobile advertising revenues.

However, these and other measures to boost mobile ad revenues come too late to affect the Q2 results.

Another drain on Google's resources is Motorola Mobility, which reported an operating loss of $342m (£224m).

Taken as a whole, investors see Google's core markets in a state of flux, and are waiting to see if its impressive momentum can be maintained.