Q1 Earnings Preview: Google (GOOG) Will Have No Problem Searching for Profits, But What About Growth?
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Google (NASDAQ: GOOG) is trading higher ahead of the company's first quarter earnings release, expected after the market closes on Thursday, April 15, 2010. Shares are trading up 0.42% to $589.25.
Google shares have seen some pressure lately, and through the quarter the shares dropped about 9.5%, from a $626.95 open on January 4, 2010, to $567.12 close on March 31, 2010. Google did pretty well through 2009, appreciating about 103%. Shares are down 6.2% YTD, while gaining a little ground from the end of the quarter two weeks ago. By comparison, Baidu.com (NASDAQ: BIDU) shares are up 55% YTD, Yahoo! (NASDAQ: YHOO) shares are up 7.4% YTD, and AOL LLC (NYSE: AOL) shares are up about 22%.
Expectations are for Google to report an EPS of $6.57 on revs of $4.93 billion for the quarter. The company posted an EPS of $6.79, ex-items, on revs of $4.95 billion for Q409, besting views. For Q109, Google posted an EPS of $5.16, ex-items, on revs of $4.07 billion. Revs missed, EPS beat views.
Data from Bloomberg shows that 32 analysts have a Buy rating on the stock, 8 have a Hold, and none recommend to Sell. The analyst consensus price target is $680.84, with a high of $810, and low of $570.
In terms of a brief valuation look, Google is trading at a forward P/E of 21.4x, Baidu is at 64x, Yahoo! is at 37x, and AOL is showing a 10.6x FY10 P/E. So, Google falls happily in the low-to-middle end of its brethren.
News Through the Quarter
The big news during the quarter was an announcement in January that Google would stop censoring results in China after its security was breached. After unsuccessfully trying to work with the Chinese government on a solution, Google ended up routing its China.cn traffic to Google.hk.com. No word yet on when a return, if any, is planned. As of right now, the Hong Kong site is still up and running.
While Google doesn't make much money from China currently, it is consider the next great frontier for the Internet and now rival Baidu (Nasdaq: BIDU) will be the big winner in the world's most populous country.
To kick off the quarter, Google introduced its Nexus One smart phone to the world. In addition the Droid phone from HTC/MOT/Google, the phone is designed to be a competitor to Apple's (NASDAQ: AAPL) iPhone, Research in Motion's (NASDAQ: RIMM) Blackberry, and anything else that Nokia (NYSE: NOK) and Palm (Nasdaq: PALM) can come up with. You can read more about the Nexus One here.
Google expanded its footprint even more when AT&T (NYSE: T) announced that they would be selling phones equipped with Google's Android O/S.
Youtube.com also tested offering movie rentals over the quarter. This would certainly be a nice revenue stream for Google, but Netflix (NASDAQ: NFLX) is a formidable competitor, and currently king-of-the-kill in that segment. Of course, according to comScore (NASDAQ: SCOR), YouTube still accounts for about 99% of all videos viewed in the Internet.
In February, Google unveiled their Buzz social networking tool. Read our report here.
Analyst Ratings Through the Quarter
Goldman Sachs noted that the Nexus One has the potential to sell 3.5 million units or so, and could add about 9% to Google's FY10 sales, reduce operating margin by 200 bps, and raise EBIT by 0 - 2%. Click here to read more from Goldman.
Credit Suisse boosted their price target on GOOG to $700 in late January, joining an elite group of about 26% of analysts covering the stock to have a price target on the company of over $700. Not surprisingly, Kaufman Bros. increased its view to $740 for the shares the very next day.
Following those increases, Deutsche Bank raised their price target to $626 from $615, and reiterated their Buy rating on the stock.
Bank of America Merrill Lynch added GOOG to their US 1 list in early February.
FBR Research increased its views on Google, stating that their is a compelling risk-to-reward relationship in the stock. Oh, and they have a $810 price target on the stock. They note that risks from a pullout in China would be more than offset by their core business, as well as YouTube, Mobile, and Display.
An analyst at BGC Partners notes that there may be more downside risk for Google with their pullout of China. Sales of their Nexus One with Android may take a slight hit [though Google is still confident in their mobile penetration in China], and could affect the price of shares by $30 - $50. The BGC analyst has a Hold rating, with a price target of $580 on GOOG.
Summary
Google is facing a perpetual battle against growing competition, stiffer regulation in the U.S. and Europe, and tough authorities in China.
The company is still in a struggle to convince U.S. antitrust authorities that their $750 million proposed acquisition of AdMob doesn't infringe on regulations. The investigation is still ongoing, but some speculate that Apple's new iAd on their iPhone OS 4.0 will make a case for Google to win the battle.
Investors may be questioning the growth left in Google. The company is ne plus ultra at generating revenue through search advertisements. Keeping that in mind, the Nexus One, YouTube, proposed TV ventures, and other undertakings all are aimed to direct users to their search engine in different ways, in order for new streams of revenue come to fruition.
However, even that is being challenged. According to comScore, Facebook.com topped Google for the number of page views for the month, having 49 billion to Google's 46 billion.
This week, Twitter announced it will be selling ads - another potential big competitor to Google.
So with growth from China in serious questions, Facbook and Twitter nipping at its heels, and Apple launching an advertising onslaught of their own, will Google be able to keep the sustained momentum that has allowed them to grow this big? Alternatively, would a stock split draw more investors into the stock? It worked for Berkshire (NYSE: BRK-B)!
Google is still a monster, expectations are low and valuation is reasonable. This is the recipe for another strong quarter and strong stock performance. But will growth questions keep investors on the sidelines?
Google is expected to release their earnings for Q110 on Thursday, April 15, 2010, at 4:00pm (EDT). Stay tuned to Streetinsider.com's Earnings section to see our analysis of the highly-anticipated quarterly results within seconds of their release.
Google shares have seen some pressure lately, and through the quarter the shares dropped about 9.5%, from a $626.95 open on January 4, 2010, to $567.12 close on March 31, 2010. Google did pretty well through 2009, appreciating about 103%. Shares are down 6.2% YTD, while gaining a little ground from the end of the quarter two weeks ago. By comparison, Baidu.com (NASDAQ: BIDU) shares are up 55% YTD, Yahoo! (NASDAQ: YHOO) shares are up 7.4% YTD, and AOL LLC (NYSE: AOL) shares are up about 22%.
Expectations are for Google to report an EPS of $6.57 on revs of $4.93 billion for the quarter. The company posted an EPS of $6.79, ex-items, on revs of $4.95 billion for Q409, besting views. For Q109, Google posted an EPS of $5.16, ex-items, on revs of $4.07 billion. Revs missed, EPS beat views.
Data from Bloomberg shows that 32 analysts have a Buy rating on the stock, 8 have a Hold, and none recommend to Sell. The analyst consensus price target is $680.84, with a high of $810, and low of $570.
In terms of a brief valuation look, Google is trading at a forward P/E of 21.4x, Baidu is at 64x, Yahoo! is at 37x, and AOL is showing a 10.6x FY10 P/E. So, Google falls happily in the low-to-middle end of its brethren.
News Through the Quarter
The big news during the quarter was an announcement in January that Google would stop censoring results in China after its security was breached. After unsuccessfully trying to work with the Chinese government on a solution, Google ended up routing its China.cn traffic to Google.hk.com. No word yet on when a return, if any, is planned. As of right now, the Hong Kong site is still up and running.
While Google doesn't make much money from China currently, it is consider the next great frontier for the Internet and now rival Baidu (Nasdaq: BIDU) will be the big winner in the world's most populous country.
To kick off the quarter, Google introduced its Nexus One smart phone to the world. In addition the Droid phone from HTC/MOT/Google, the phone is designed to be a competitor to Apple's (NASDAQ: AAPL) iPhone, Research in Motion's (NASDAQ: RIMM) Blackberry, and anything else that Nokia (NYSE: NOK) and Palm (Nasdaq: PALM) can come up with. You can read more about the Nexus One here.
Google expanded its footprint even more when AT&T (NYSE: T) announced that they would be selling phones equipped with Google's Android O/S.
Youtube.com also tested offering movie rentals over the quarter. This would certainly be a nice revenue stream for Google, but Netflix (NASDAQ: NFLX) is a formidable competitor, and currently king-of-the-kill in that segment. Of course, according to comScore (NASDAQ: SCOR), YouTube still accounts for about 99% of all videos viewed in the Internet.
In February, Google unveiled their Buzz social networking tool. Read our report here.
Analyst Ratings Through the Quarter
Goldman Sachs noted that the Nexus One has the potential to sell 3.5 million units or so, and could add about 9% to Google's FY10 sales, reduce operating margin by 200 bps, and raise EBIT by 0 - 2%. Click here to read more from Goldman.
Credit Suisse boosted their price target on GOOG to $700 in late January, joining an elite group of about 26% of analysts covering the stock to have a price target on the company of over $700. Not surprisingly, Kaufman Bros. increased its view to $740 for the shares the very next day.
Following those increases, Deutsche Bank raised their price target to $626 from $615, and reiterated their Buy rating on the stock.
Bank of America Merrill Lynch added GOOG to their US 1 list in early February.
FBR Research increased its views on Google, stating that their is a compelling risk-to-reward relationship in the stock. Oh, and they have a $810 price target on the stock. They note that risks from a pullout in China would be more than offset by their core business, as well as YouTube, Mobile, and Display.
An analyst at BGC Partners notes that there may be more downside risk for Google with their pullout of China. Sales of their Nexus One with Android may take a slight hit [though Google is still confident in their mobile penetration in China], and could affect the price of shares by $30 - $50. The BGC analyst has a Hold rating, with a price target of $580 on GOOG.
Summary
Google is facing a perpetual battle against growing competition, stiffer regulation in the U.S. and Europe, and tough authorities in China.
The company is still in a struggle to convince U.S. antitrust authorities that their $750 million proposed acquisition of AdMob doesn't infringe on regulations. The investigation is still ongoing, but some speculate that Apple's new iAd on their iPhone OS 4.0 will make a case for Google to win the battle.
Investors may be questioning the growth left in Google. The company is ne plus ultra at generating revenue through search advertisements. Keeping that in mind, the Nexus One, YouTube, proposed TV ventures, and other undertakings all are aimed to direct users to their search engine in different ways, in order for new streams of revenue come to fruition.
However, even that is being challenged. According to comScore, Facebook.com topped Google for the number of page views for the month, having 49 billion to Google's 46 billion.
This week, Twitter announced it will be selling ads - another potential big competitor to Google.
So with growth from China in serious questions, Facbook and Twitter nipping at its heels, and Apple launching an advertising onslaught of their own, will Google be able to keep the sustained momentum that has allowed them to grow this big? Alternatively, would a stock split draw more investors into the stock? It worked for Berkshire (NYSE: BRK-B)!
Google is still a monster, expectations are low and valuation is reasonable. This is the recipe for another strong quarter and strong stock performance. But will growth questions keep investors on the sidelines?
Google is expected to release their earnings for Q110 on Thursday, April 15, 2010, at 4:00pm (EDT). Stay tuned to Streetinsider.com's Earnings section to see our analysis of the highly-anticipated quarterly results within seconds of their release.
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