We think that the company will easily beat top line estimates, but come in close to bottom line expectations.
Google Inc (GOOG) is set to announce its fourth quarter earnings tomorrow after the bell. Judging from market trends such as search metrics and ecommerce growth, we think that the company will easily beat top-line estimates, but come in close to bottom line expectations.
Google saw much higher query volumes and rising click-through rates that we think will be slightly offset by lower CPCs. The company obviously gained from soaring ecommerce sales, both on account of the holiday season and as a result of the retail market, particularly for electronic goods continuing to shift to the online channel.
Rising query volumes are a big positive, an indication of the success of Google’s growth strategy. In fact, preliminary search data indicates that the company actually gained share in the last quarter, although Microsoft Corp’s (MSFT) Bing grew faster off a smaller base (compared to the year-ago quarter), while Yahoo Inc. (YHOO) continued to see declines.
The other thing of note is the rising click-through rate. Google has been criticized for the way it continues to change its search algorithms and the company has continued to defend itself saying that it has moved in the interests of users. The rising click-through rates suggest that Google is moving in the right direction.
However, the quarter will not be without challenges. Europe could weigh on results, since market conditions remain uncertain here. However, commenting on the situation now is a bit like a guessing game. The truth is, Google’s fourth quarter performance versus estimates hinges to a significant extent on how it does in Europe.
We think that investors are also likely to consider Motorola Mobility’s disappointing earnings announcement, since the company is set to acquire Motorola this year. Although Google will no doubt discuss Motorola on the call, investors could express disappointment if Google decides to pursue the business instead of just picking up the patents and discarding the rest. In any event, this is something that will be a pressure on share prices even if Google beats estimates.
Regulatory concerns also remain, although Google has the financial muscle necessary to deal with the situation.
Estimate Revisions Skewed Both Ways
Six analysts raised fourth quarter estimates in the last 30 days, while two moved in the opposite direction. For the following quarter, too, three analysts raised estimates, while three lowered. For fiscal years 2011 and 2012, five and four analysts raised estimates, respectively, while two and three, respectively moved in the opposite direction.
Magnitude of Revisions Not Significant
Given that 25 analysts currently track Google shares, it is therefore not surprising that the net impact on estimates was not significant. Overall, estimates for the next two quarters increased 3 cents and 2 cents, respectively in the last 30 days, respectively. They were also up 6 cents for fiscal 2012.
To Conclude
Google is on a great run, having breezed past third quarter estimates on the strength on broad-based revenue growth and strength in the mobile business (something that should continue in the fourth quarter). For further details please see Google Remains Search King.
It is apparent that its search quality improvements, and three-pronged focus on display, video and mobile are paying off. With Google+, the digital wallet, daily deals, ITA and other initiatives, it appears that the company has a finger in every online pie. It has also proved time and again that it can generate stellar results. Therefore, while the above-mentioned headwinds remain, we are optimistic about the company’s fourth quarter results.
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