Google (GOOGL) will report third quarter results on Oct 16 and its chances of beating estimates look slim.
Our proven model to predict a positive surprise is based on two main factors: A Zacks Rank of #1, #2, or #3 along with a positive Zacks Earnings ESP. Therefore, Google’s current Zacks Rank #4 (Sell) and Zacks Earnings ESP of 0.00% make surprise prediction difficult.
Moreover, its surprise history is also not encouraging, since the company has missed estimates (albeit by a narrow margin) in three of the last four quarters. Hence we don’t recommend the shares going into the earnings announcement.
However, here are a few things going for Google-
Strong paid search spending trends: Search Engine Land estimates that paid search spending increased 8% in the first quarter of 2014, jumping to 21% in the following quarter. This indicates that Google’s core market continues to grow very strongly.
Dominant market share: Microsoft (MSFT) has come a long way with Bing, which has been growing market share. But comScore numbers indicate that these gains, particularly against Google aren’t substantial. Yahoo (YHOO) has slipped to the third position and doesn’t look capable of rising any time soon. Google is even more dominant in most international markets other than China, where local search giant Baidu (BIDU) reigns. YouTube is the leading destination for video uploading and playing although competing platforms are under development.
Search products: Enhanced campaigns and product listing ads remain strong contributors.
Other income: This is still at just 10% of Google’s revenue, but is significant as an indicator of Google’s ability to diversify away from search. Driven by higher Play Store sales whether apps, content or devices, this is an area worth tracking.
Devices: Google is designing a growing number of devices that are manufactured by hardware partners. With its own tablets, phones, chromecasts, smart thermostats and wearables like Glass, Google is ensuring its presence in each section of the mobile and IoT world. Since this enables optimum pricing (hardware partners can price competitively with Google supplying the OS for free), Google devices can reach more hands, in turn spurring sales of apps, content, and so forth.
And here’s what’s going against it-
Falling CPCs: The cost per click or pricing and volumes influence margins. Therefore, the persistent weakness in CPCs driven by the increasing share of mobile/emerging markets and programmatic buying is a negative.
Rising TAC costs: Traffic acquisition cost, or TAC is the portion of revenue shared with Google’s partners and amounts paid to distribution partners and others who direct traffic to the Google website. While network TAC continues to decline, distribution-related TAC is on the rise. Growing leverage of strong hardware partners like Samsung and increasing competition is the likely reason for this. Distribution-related TAC is unlikely to go down in the near term although Google is trying to work with a larger number of hardware partners (it is partnering with HTC for the new Nexus).
Strength in other platforms: Other platforms such as Facebook and Twitter are engaging eyeballs, particularly on mobile devices. Facebook in particular is capturing user attention for increasing periods of time and attempting new technologies like graph search and deep linking that are keeping users away from Google.
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