Google Earnings: Mobile And YouTube Are Key Growth Drivers
Google (NASDAQ:GOOG) is set to release its Q1 2013 earnings Thursday, April 18. The company’s stock had an eventful first quarter as it touched an all time high of $831 in March. Since then the stock has declined and is currently trading at $780. The focus in the Q1 earnings release will once again be on the progress Google has made in its mobile business. The mobile search business accounts for a third of our $740 price estimate for Google and is a key driver of growth. Additionally, we will track the company’s progress in its non-core products segments such as Youtube, which is also seeing rapid growth and accounts for just under 10% of our estimates.
See our complete analysis of Google
Recap Q4 2012 Earnings
In Q4 2012, the company reported consolidated revenues of $12.9 billion, up nearly 22% year-over-year. However, Google’s core revenues (excluding Motorola) only grew to $13 billion, growth of 21% year-over-year. While the company reported strong top line figures, its operating income fell by approximately 5%, to $3.5 billion. It also reported higher traffic acquisition costs as a percentage of advertising revenues, 25% in Q4 2012 versus 24% in 2011. Additionally, as a result of Google’s push into mobile advertising, the company’s cost-per-click dropped 6%, which was offset by 24% growth in aggregate paid clicks. This combination led to a 20% increase in advertising revenues.
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Mobile Search Ads Is Key To Revenue Growth
During Google’s Q4 earnings call, CEO Larry Page, reiterated the company’s focus on its mobile and social products. [1] In our opinion, mobile is key for Google’s growth over the long term because more users will access Internet via mobile devices in the coming years. Moreover, Gartner has predicted that worldwide mobile ad revenue will exceed $11 billion in 2013, and the growth rate for ad revenue will be over 400% during 2011-2016. [2]
In our article published earlier, we stated the importance of mobile for its search ads revenue. [3] Google continues to bolster its search capabilities on its mobile platform with new releases such as voice search. During this earnings announcement, we will be closely watching Google’s mobile advertising run-rate given its growth potential.
Additionally, we will closely monitor the average cost per click (CPC), which declined at a slower rate in Q4 2012. We expect the decline in CPC to slow further as advertisers increase their advertising budgets for mobile.
YouTube’s Revenues To Aid Display Ads Revenue
According to our estimates, YouTube division constitutes approximately 8% of Google’s value. Revenues from this division were around $2.13 billion in 2012, and we think that they will continue to increase and reach around $15 billion by the end of our forecast period. YouTube has been solid over the past year and viewers watched over 4 billion hours of video on YouTube a month in 2012. Google’s top 100 global advertisers spent over 50% more in 2012 than they did in 2011 on advertising on YouTube.
We expect this trend to continue in the coming quarters and think that as video content gains popularity, particularly across devices, advertisers will be more willing to increase their ad spend further.
We currently have a $737 price estimate for Google, which is approximately 6% below the current market price.
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Notes:- Earnings Call Transcript, Seeking Alpha [↩]
- Gartner Worldwide Mobile Advertising Revenue, January 17 2013, www.gartner.com [↩]
- Google’s Mobile Success Is Key Factor In Stock’s 30% One-Year Gain [↩]