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Can Ruth Porat Improve Google’s Cost Discipline?

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Internet companies have increased their spending substantially on new initiatives

Google (GOOG) has been known for investing in too many new initiatives. Some of these initiatives include Google Glass, Google Fiber, and self-driving car projects. These are mainly long-term projects that take the time to materialize. Google also shelves projects it thinks won’t materialize.

For example, a few months back, Google put the Google Glass project on hold because it wasn’t meeting expectations. In these cases, the company has losses to bear, and they can affect the company’s operating margins. Google also mentioned early this year that it’s increasing its investments across various business lines, which include Google’s Cloud, Google for Work (for enterprise customers), Google Play, and the company’s hardware business (smartphones and tablets).

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Google isn’t the only player in the Internet industry to substantially increase its investments. Amazon (AMZN) just about broke even in 2014 and even made huge operating losses in a few quarters of 2014. For more on this topic, read Investing in Amazon stock? Key risks you should watch out for. However, in the last couple of quarters, Amazon has become profitable.

Facebook (FB) also expects its spending on operating expenses to increase by 55%–65% this year compared to last year. Twitter (TWTR), on the hand, continues to record net losses.

Google has managed to increase its margins, courtesy of Ruth Porat

In 2Q15, Google’s cost discipline efforts have started to show their effect. As the chart above shows, Google’s operating margins continued to increase in the last three quarters, from 22.5% in 3Q14 to 27.2% in 2Q15. Analysts have given the credit for the operating margins boost to Google’s new CFO, Ruth Porat, who has started a cost savings program.

One of the major initiatives of the cost-saving program was the slowdown in the company’s employee count increase. Google added only 1,719 employees in 2Q15, which was the smallest increase since 4Q13.

For diversified exposure to Google, you can consider investing in the PowerShares QQQ Trust, Series 1 (QQQ). QQQ invests 3.5% of its holdings in Google.

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