Google Earnings Preview: What We’re Watching

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Google (NASDAQ: GOOG) is expected to announce Q2 2011 earnings on July 14th. The company continues to dominate the search advertising market where it competes with Microsoft (NASDAQ:MSFT), Yahoo (NASDAQ:YHOO) and AOL (NYSE:AOL). However, in recent quarters Yahoo has registered significant market share gains compared to Google, [1] which has shown a relatively flat outlook over the past 3 months. During the upcoming earnings release, we will keep a close eye on Google’s search ad revenue growth, as well as the company’s operating expenses, which surged in Q1 2011 from the same quarter last year.

Our price estimate for Google stock stands at $576, which is at a 5% premium over the current market price.

Margins threatened by Growing Operating Expenses

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Google reported a steep rise in operating expenses driven by sales & marketing and general expenses in Q1 2011, which rose by 69% and 44% year over year. During this same period revenues grew by roughly 27%. The escalating expenses are attributable to increased promotion of the Chrome browser as well as a 10% salary increase across-the-board in the company.

We expect some of these bottom-line trends to continue in Q2 2011 as Google respond to increasing competition from Yahoo and Microsoft in both search and browser markets. Additionally, given that Internet usage slows down historically in summer months, we could see a downside to profit margins for the coming quarter.

Google’s Domination Continues, but Competitors Catching Up

Google continues to be the dominant player in the global search engine with market share of about 68% in 2010. However, the last quarter has seen a relatively flat outlook in Google’s search engine market share as compared to competitors both in the U.S. and non-U.S. markets. Google’s total search share has in the U.S. in fact declined from 64.2% in Apr 2011 to 63.3% in May 2011 while Yahoo registered a 1.7% gain in market share for the same period. [2] Another significant long-term threat is the recent web-search partnership between Microsoft and Baidu in China, [3] which should give Baidu access to Bing’s technology. This can signal a further decline to Google’s audiences in the world’s largest Internet user-base. [4]

See our complete analysis for Google

Notes:
  1. comScore May 2011 search engine rankings []
  2. comScore’s May 2011 search engine rankings []
  3. Bloomberg; Microsoft, Baidu to expand web-search partnership in China []
  4. Internet World Stats: Internet Usage in Asia []