Google Earnings Preview: Ads, Mobile & Social in Focus

Google (NASDAQ:GOOG) is the global leader in online search and advertising space where it competes with the likes of Microsoft (NASDAQ:MSFT), Yahoo (NASDAQ:YHOO) and Facebook. It is also the dominant player in mobile market with Android which competes primarily with Apple‘s (NASDAQ:AAPL) iOS and Microsoft’s Windows Phone. Almost all of its revenue is driven by its search advertising business. Google will report its earnings for Q1 2012 on April 12, and we will closely watch its performance in search, mobile and social networking segments.

Check out our complete analysis of Google

Search Advertising

While Google occasionally dabbles in side projects, search advertising continues to generate almost all of its revenues. Last quarter, Google’s stock took a pounding after it released its earnings results that saw a significant drop in cost-per-click levels despite a greater rise in aggregate paid clicks. The drop could be attributed to the increase in mobile searches. If this trend continues, we expect this to impact Google’s search revenue growth in the coming years. We should see more data on this in the upcoming earnings, which should help us determine whether this was a one-off drop or a trend which could continue, going forward.

Mobile

Google continues to see an increase in its mobile search metrics. Android now rules the smartphone market globally, with the iPhone coming a distant second. Ironically, Google generates more average revenue from the iPhone than it does from Android. We expect Google’s mobile search ad revenue will continue to increase in the coming years. The company aims to drive budget smartphone sales, and hence mobile ad revenue, through Android. However, Android faces a series of threats, ranging from device fragmentation to increasing competition from iOS and Windows Phone. Since Windows Phone is powered by Bing, and the search experience in iOS is controlled by Apple, Google risks losing mobile search market share if these platforms beat Android in the coming years.

We expect to see some more details on Google’s Android strategy following the Motorola acquisition and its plans to enter the tablet space with its own offering in the upcoming earnings.

Social

While Google completely dominates the search market, Facebook’s dominance in the social networking space could be a threat, as search increasingly becomes social. Google launched Google+ precisely to counter the Facebook threat, and to improve its search experience by incorporating social elements. Google could also see an increase in display advertising revenue if Google+ takes off. Larry Page has been focused on Google+ since he became the CEO. We expect to see some updated usage metrics about Google+ on this earnings call.

We currently have a $670 Trefis price estimate for Google, which stands 4% above its market price.

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