- Google's core and non core businesses are likely to improve in Q2.
- Google's profitability is likely to improve in Q2 2014.
- Google is an attractive investment for the long term.
Internet search giant Google (NASDAQ:GOOG) is scheduled to report its earnings for Q2 2014 on 17 July 2014. After Google’s announcement to sell off its Motorola segment to Lenovo during the early part of Q1, expectations from Google’s quarterly earnings were higher. However, the company delivered slightly disappointing numbers pushing the stock lower by about 3.5% on the day after the earnings release. All eyes will be on Google’s numbers this quarter given that the stock has risen by close to 10% since then.
Google missed both revenue and EPS estimates last quarter. The company registered a revenue of $15.42 billion vs estimates of $15.5 billion translating to estimate miss of 0.5%. Google’s EPS came in at $6.27 a share vs estimates of $6.4 a share implying that it missed estimates by 2%.
While the company did miss estimates on both fronts, in absolute terms, its financials weren’t all that disappointing.
Google Q1 2014 Revenue and Profitability
Google’s revenue grew at 19% Year on Year (Y/Y) which isn’t bad given the company’s massive revenue base. Excluding revenue contributions of Motorola in the previous quarters, Google’s revenue has grown at a Compounded Annual Growth Rate of 20.6%, not too much higher than 19%. Further, the revenue miss is lower than $80 million on a forex neutral basis at $30 million.
There is however, one development worth noting. Google’s sequential decline in revenue growth (over Q4 2013) of -1.2% is its first sequential decline recorded since Q1 2010. That said, given the magnitude of the decline, one might not want to read too much into it.
As for profitability, Google recorded operating and net profit margins of 26.7% and 22.4% for Q1 2014. At the end of the quarter, Google’s headcount included Motorola employees, implying that operating margins were not entirely ex-Motorola. Further, legal and M&A expenses pertaining to the Motorola sale also weighed on profit margins.
Google Financial Metrics
Cost Per Click (CPC) declined by 9% Y/Y for the quarter in line with the consistent trend over the last few quarters. CPC is the revenue Google’s earns for clicks on ads served. Again, in line with the trend, Paid Clicks grew at 26% Y/Y.
Faster growth in revenue from Google’s own and owned (O&O) sites as opposed to revenue from its network partners reduced Traffic Acquisition Costs (TAC) as a percentage of total ad-revenue. TAC for the quarter declined 1% sequentially and 2% Y/Y to 23% of ad-revenue. Given that Google sites have been generating a bigger share of the ad revenue on an ongoing basis, investors will be hoping that the trend continues.
Google Q2 2014 Analyst Estimates
Analyst estimates peg Google’s revenue for Q2 2014 at $15.62 billion imply a Y/Y growth of 19.2%.
EPS estimates stand at $6.25 a share.
Google Q2 2014 Outlook
Google’s operating profit margin of 27% registered the company’s highest operating margins since the acquisition of Motorola. As the impact of Motorola is completely eliminated, profitability could improve in the coming quarters.
Google’s non-core businesses have been growing at a fast clip. Having registered a growth of 111% in 2013, this segment of Google’s revenue stood at $5 billion. In the coming years, this could become a driver of Google’s overall revenue.
Google recently launched a programmatic video ad buying platform. The platform is expected to boost monetization of video ads for Google. Further, given Google’s stronghold on video viewership with YouTube, the impact if any in Q2 will be interesting to note. Google is also in the middle of expanding other businesses like its shopping express and aspects of Google Play like music, movies, etc.
Google currently trades at $593 a share with a PE ratio of 31. Even Google’s Price to Sales ratio of 6.5 translates to cheaper valuations compared to peers like Yandex and Baidu. Though Baidu and Yandex grow at a faster pace with better profitability, they are relatively more vulnerable to macro-economic and political risks.
Google’s dominance of the internet search industry coupled with its stable growth, profitability and cash flows makes it an attractive investment at its current valuations. Our Google Stock Analysis assigns it a buy rating in line with our long term view of the stock.