- Google looks set to register strong revenue growth in Q3 2014.
- Profit margins could improve as Motorola salaries dragged profitability in Q2 2014.
- Google is attractive at its current valuations.
Google (NASDAQ:GOOG) is set to report its earnings for Q3 2014 on 16 Oct. Google’s previous earnings release was a mixed bag as the company delivered strong revenue growth but disappointed on the earnings front. Towards the end of the Q3, Google launched its much anticipated series of entry level smartphones, Android One. The company also put on sale the beta version of its controversial Google Glass. Analyst estimates indicate that a higher growth is expected from Google in Q3 2014. We recap Google’s previous quarter and outline the expectations from the upcoming results.
Google Q2 2014 Revenue & EPS Performance
In Q2 2014, Google delivered a revenue of $15.96 billion beating analyst estimates by about 2.2% or $340 million.
However, Google’s Non-GAAP EPS (earnings per share) of $6.08 a share disappointed investors, coming in 2.7% lower than estimates.
Google’s stock price jumped by over 4% on the day after the earnings release, reacting to the strong revenue growth and improvements across metrics.
Google Revenue Growth
In Q2 2014, Google registered a revenue growth of 21.8% YoY (over Q2 2013). Note that revenue contributions from Motorola have been eliminated from the preceding quarters for all growth related computations. Google YoY revenue growth accelerated to touch its peak over the Last Twelve Months (LTM).
Google’s revenue growth was driven by strong growth in its core and non-core businesses. Revenue from advertising, the company’s core business, grew by 19% YoY as against a growth of 17% in the preceding quarter and 15% in the year ago quarter. The non-core business registered a growth of 53% YoY, marking a 5% acceleration from the Q1 growth rate of 48%.
Ad-revenue from Google’s own online properties/sites grew at a faster pace when compared to ad-revenue from its partner sites. This was a positive for Google since it has to share a portion of ad-revenue generated on its partner sites with the owners of those sites.
Google’s CPC (cost per click) or click pricing declined by about 6% YoY, a positive given that CPC had fallen by an average of 10% over the preceding 2 quarters. The number of paid clicks also showed an improvement, growing by 25% YoY vs 23% growth in Q2 2013.
Google Profit Margins
In Q2 2014, Google clocked operating and net profit margins of 26.7% and 21.4%, marking improvements over their respective LTM averages of 23.8% and 21.3%.
While Google’s profitability fell short of analysts’ expectations, it’s important to note that Motorola employees continued to form a part of Google’s headcount during the quarter. The fact that Motorola’s workforce accounted for about 7% of Google’s manpower in Q2 indicates the potential for improvement.
Google Q3 2014 Outlook
Google’s Q3 2014 revenue looks set to improve, driven by strong growth in both, core and non-core businesses.
Ad-spends typically increase in the second half of the year. While growth in paid clicks and the potential increase in ad-spends could drive ad-revenue, new product launches are likely to drive non-core revenue growth. In a recent post, we analyzed the Android One revenue potential to bring out why it’s a big opportunity for Google.
The impact of the Android One series might be limited in Q3 since it was launched on 15 Sep 2014, just a fortnight before the end of the quarter. Another significant opportunity lies in Google Glass’ revenue potential, a product which was launched in beta stage during Q3 2014.
Two connected aspects where Google would certainly be hoping to improve upon its Q2 performance would be:
- TAC (traffic acquisition costs) - TAC remained flat at 23% in spite of the slower growth in ad revenue from network partners.
- CPC on O&O sites – CPC’s have been falling more on Google’s Own & Owned sites compared to CPC’ on sites in its ad-network. This is most likely the reason why TACs have been sticky as well.
Is spite of the falling CPCs, the fact that ad-revenue has grown faster on Google’s sites shows that the O&O sites have driven the improvement in Paid Clicks.
However, CPCs might continue to decline given the increased competition from ad-networks like Facebook’s Atlas, and further expansion into emerging economies, where CPCs are lower.
Google Q3 2014 Earnings Estimates
Analyst estimates peg Google’s Q3 revenue at $16.59 billion, translating to a growth of 21% YoY.
Non GAAP EPS estimates of $6.55 a share, represent a 22% YoY growth in earnings.
Google currently trades at a stock price of $570.81 a share. Google’s PE ratio of 29.5 and Price to Sales ratio of 6 make it the most attractive in terms of valuations among its search focused peers Baidu and Yandex.
Google has lower growth rates and profit margins when compared to its peers. But is also significantly larger in terms of its revenue base and global market share. Further, Google is also less vulnerable to geographical or geo-political risks, making it less volatile in the short term. Our Google stock analysis assigns the stock a buy rating at its current valuations.