Google’s Earnings Preview: Focus on Revenue Growth From Ad Divisions And Motorola Mobility

Google (NASDAQ:GOOG) is set to release its Q4 2013 earnings and full year results on Tuesday, January 30. During the past year, Google’s stock rallied 55% due to the bullish investor sentiments for Internet tech stocks and the company’s revenue growth potential. In Q3, the company surprised the market with better than expected results as its enhanced campaigns program buoyed ad volume across the display and search ad divisions. In this earnings announcement, we expect the enhanced campaigns program to once again drive revenue across its mobile and PC search ads divisions. Furthermore, as YouTube continues to gain popularity, we expect display ad revenues to be higher. Moreover, the focus will once again be on the Motorola mobility and its profitability as it launched a smartphones in Q3.

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Multiplatform Strategy To Boost Ad Revenues From Mobile

In Q3, as the multiplatform enhanced campaigns program came into effect, it was instrumental in increasing the aggregate paid clicks, which mirrors the number of ads sold by 26%. This program stimulated the demand for mobile adwords as advertisers were bidding more frequently for them. ^[1] We believe this trend continued in the fourth quarter as well, as more advertisers switched to enhanced campaigns. Additionally, we think that the Android platform, which now runs on over a billion devices, continued to lead as the preferred mobile device platform.  We believe it will continue to lead and increase the number of aggregate paid clicks.

Gartner has predicted that worldwide mobile ad revenue will exceed $11 billion in 2013, and that the growth rate for ad revenue will exceed 400% during 2011-2016. ^[2] We currently estimate that mobile search ads contribute approximately a third of the firm’s value. According to our estimates, the company’s mobile revenues will increase by at least 50% in 2013 to around $6.1 billion from $4 billion in 2012. Even though mobile search ads are expected to only generate 14% of the company’s total revenues in 2013, we expect this figure to reach to almost 35% by 2020.

YouTube Revenues To Boost Display Ads

According to our estimates, YouTube contributes approximately 10% to Google’s value. According to comScore, Google is the market leader in the online video content industry with nearly 160 million unique viewers as of December 2013. ((comScore Releases December 2013 U.S. Online Video Rankings, January 10 2014, www.comscore.com)) Considering the explosive growth in online video ads spent, we expect YouTube to be a key contributor to Google’s revenue growth going forward. We expect that the unique user count for YouTube rose during the quarter, given the increasing popularity of this platform. We expect the YouTube division clocked $3.6 billion in net revenues in 2013, and believe it will reach around $18.5 billion in the coming five years.

Revenues Growth At Motorola In Focus

The Motorola Mobility division continues to post operational losses since its acquisition by Google last year. Google re-introduced Motorola in the mainstream mobile market with the launch of Moto X smartphone in the third quarter. We will be looking out for the sales number of Motorola’s new offering during the quarter. Additionally, we want to know Google’s strategy to stem losses at this division.

We currently have a $991 price estimate for Google, which is 15% below the current market price.

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1. Earnings Transcript, October 17 2013, www.seekingalpha.com [↩]
2. Gartner Worldwide Mobile Advertising Revenue, January 17 2013, www.gartner.com [↩]