Google (NASDAQ:GOOG) reported its earnings for Q1 2012 on April 12, with gross revenue of $10.65 billion, up 24% year-on-year.  It also reported a significant jump in operating and net income, and the same ratio of traffic acquisition costs as a percentage of advertising revenues as in 2011 – 25%. As a result of its push into mobile advertising, the cost-per-click dropped nearly 12% over last year, but there was a 39% growth in aggregate paid clicks, which led to a healthy increase in advertising revenues. We expect this trend to continue, as mobile search advertising drives the next phase of earnings growth for Google while traditional online search advertising takes a backseat. Following the earnings release, Google’s stock has rallied up nearly 3%, which brings it closer to our value estimate.
Mobile and Social to drive Google’s ad revenue going forward
Going forward, we expect mobile search advertising revenue to continue to increase at a rapid pace, and eventually supplant traditional search advertising as Google’s primary cash cow.
Since the average revenue per search is lower for mobile ads, the rise in mobile advertising should continue to weigh on the average cost-per-click charged to advertisers. However, the increase in the aggregate number of paid clicks driven by increasing mobile internet usage will more than compensate for it and lead to an overall increase in Google’s ad revenues.
Eventually, we expect Google’s average revenue per mobile search to increase, as Google improves its mobile ad offering and attracts more advertisers through better targeting and a higher ROI with hyper-targeted ads.
We also expect Google’s Android efforts to pay off in the smartphone and tablet spaces eventually, by indirectly helping drive the growth of mobile advertising.
While Google continues to be secretive about the usage metrics of Google+, Larry Page did reveal that more than 170 million users have upgraded to Google+, and that it is seeing impressive engagement and healthy growth. He also called Google+ the company’s social spine, the one thread that connects all of its other offerings with a social layer.  If Google is able to attract a significant user base, it could not only generate increasing amounts of display advertising revenue from Google+, but also use the social data gathered from Google+ to improve its core search experience and generate more revenue from advertising by offering better targeting features.
We expect Google to continue to focus on Google+ with more updates, despite criticism that it is a ghost town, with very low engagement, compared to Facebook, its arch nemesis.
We currently have a $670 Trefis price estimate for Google, which stands 2% above its market price. We’re in the process of revising our model based on the new numbers reported this quarter. Google derives most of its value from advertising, a space where it competes primarily with Microsoft, Yahoo and Facebook.Notes: