Q2 Preview: Google (GOOG) Will Need a Clear Path to Transition as Competition Continues Heating Up

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Shares of Google (Nasdaq: GOOG) are outperforming the broader equities market Thursday morning ahead of the company's second-quarter results, due out after the market close. While the S&P 500 and Nasdaq are up 0.47 percent and 1.1 percent, respectively, Google shares have been bid up by more than 2.9 percent this afternoon.

Analysts are expecting Google to report quarterly earnings around $10.04 per share on sales (excluding traffic acquisition costs) of $8.41 billion. The search giant posted first-quarter 2012 earnings of $8.75 per share and EPS of $7.68 during the second quarter of 2011. If Google can hit the earnings estimate this quarter, profit would have grown by more than 30 percent.

As our Earnings History page shows, despite a more than 40 cent per share beat on April 12th (Q1), Google shares tumbled 4 percent the next day and another 3 percent on the following trading session. Going back one more quarter, Google missed fourth-quarter earnings figures by nearly a $1 per share and the stock fell 8 percent the next day. The similar reaction to the very different results point to one thing, and serve as somewhat of a warning (or chance for opportunity): extreme share price volatility around the company's earnings release.

Analyst Commentary:

• Goldman Sachs - The firm warned of "the company’s nearly 30% exposure to EMEA including the UK, where we estimate CPCs remain under pressure, present a near-term headwind for the company especially given currency headwinds. As such, we would not be surprised for an in line performance in the US to be offset by revenue headwinds in Europe..."
  
  Maintains Neutral rating and $640 price target.
  
  
• Wells Fargo - Recently revised estimates to account for "a more negative FX impact." The firm's second-quarter EPS estimate was lowered from $9.66 to $9.45. Additionally, Wells Fargo believes as Google continues to compete more with Apple and Amazon, an "uncertain business model transition..." lies ahead.
  
  Wells Fargo said, "We think the big question for Google is the strategy around selling hardware (both Nexus & MMI). They can pursue many different paths (share, margins, subsidies) that will have varying short and long-term financial ramifications. We think Google needs to find their strategy given Apple's strength and Amazon's plan to use commerce to subsidize tablets..."
  
  Maintains Market Perform rating and $580-$610 valuation range.
  
  
• Oppenheimer - Sees expectations as low heading into the quarter, but said numerous overhangs are affecting the stock's valuation. The firm believes the "focus on mobile cannibalization overstated, in our view, with data showing macro, geographic mix and "Quality Improvements" having a greater impact."
  
  Oppenheimer warned currency weakness will likely weigh on international sales.
  
  Maintains Outperform and $752 price target.

Google normally reports just minutes after the closing bell. Stay tuned to our Earnings category to get all the latest breaking news on the earnings front.

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