- We expect Google’s revenue and profitability to improve post the sale of Motorola.
- Google core business is robust with multiple positives.
- Google stock is attractive at its current price.
Post market hours on 16 April, Google (NASDAQ:GOOG) will report its first quarter of earnings excluding Motorola (since purchase) from its top-line. We look at analyst estimates for Q1 and what to expect from Google’s core business, the impact of Motorola on prior results and other potential drivers of Google’s future.
Google Q1 2014: Analyst Estimates
The midpoint or average of analyst / consensus estimates peg revenue at $15.5 billion and adjusted EPS at $6.4 per share.
Google’s Historical Financial Performance
In Q4 2013, Google recorded a revenue of $16.8 billion and went past revenue estimates despite the decline in revenue from its Motorola segment. While Google’s total revenue grew at about 17%, revenue from its Google segment (excluding Motorola) grew at a much faster pace of nearly 22%.
Google’s 3 year average revenue growth stands at a healthy 27% despite being dragged by Motorola for over half of that period. Operating profit margins and net profit margins have averaged 27% and 23% respectively over a 3 year period, indicating the potential upside post Motorola.
In Q4 2013, ‘paid clicks’ grew at a healthy 31% to offset an 11% fall in ‘cost-per-click’ or CPC. Ad-revenue from Google’s own sites grew at 22% vs a 3% growth in revenue from its ad-network. Google’s DoubleClick ad-exchange has been growing at a fast pace and the recent tie-ups with Facebook and Yandex to cross sell ad-inventory on each other’s ad networks could drive its progress.
Operating margins in Google’s core business could shrink in Q1 on account of higher traffic acquisition costs or TAC and data centre costs. However, we find multiple reasons to be optimistic about Google’s core business.
Impact of Motorola sale on Google’s Financials
Since its acquisition in May 2012, Motorola’s contribution to Google has been largely negative. Motorola contributed a little over 7% to Google’s revenue in FY 2013. However, since its peak in Q3 2012, Motorola’s revenue has been on the decline, dragging Google’s overall revenue growth rate.
Further, Motorola hasn’t managed any profits as a part of Google. In FY 2013, the segment registered an operating loss of nearly $ 1.25 billion dragging Google’s operating profit margin by over 8%.
Undoubtedly, the sale of Motorola will favorably impact Google’s financials going forward.
Other Potential Highlights in Google’s Q1 2014
Google’s ‘enhanced campaigns’ promotes the development of ads that run across devices and could aid growth in mobile advertising. With its dominant position in mobile search, this could drive mobile CPC, a potential driver for Google in the future as desktop search CPCs are on the decline.
The addition of Google Newsstand with over 2,000 free and paid news sources could boost Google’s ‘other revenue’ which nearly doubled to $1.6 billion in Q4 2013, driven by sale of hardware (Nexus handsets and Chromecast projectors) and digital app sales (Google Play Store). This segment could soon compensate for the drop in overall revenue post the Motorola sale.
Online video advertising primarily on YouTube could gain a lot from a reinforcement of faith by Neilsen’s Online Campaign Rating (OCR) which is tracking ad-performance on YouTube. To put things into perspective, 84% of unique viewers of online video content visit Google sites (primarily YouTube) followed by Facebook’s 42%. Further, on Google sites, viewers spend 7 times the time they spend on Facebook.
Both investors and competitors will be hoping for updates about Google’s much debated foray into the online travel and wireless network businesses. While online travel related businesses like Priceline, Expedia and TripAdvisor are currently advertisers with Google, the company’s aggressive entry into this space is sure to ruffle some feathers.
Google’s latest acquisition ‘Nest’ has temporarily shut down sales of its product, Nest Protect (smoke detectors) owing to a malfunction. The smoke detector is only the second product in Nest’s line-up and this development comes close on the heels of a law suit pertaining to its other product, the ‘Learning Thermostat’. This will not have any serious impact on Google in monetary terms. However, investors will be eager to know more.
After a fall of over 11% from its 52 week high of $615, at its current price of $545 a share, Google trades at a P/E multiple of 28.6. Though its P/E is closer to its LTM (last twelve months) peak of 32, Google’s PEG multiple (Price/Earnings Growth) is closer to its 1 year low. We think Google is an attractive investment for the long term.
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