Google Earnings Preview: Revenue Growth To Remain Strong

Google (NASDAQ:GOOG) is set to release its Q1 2014 earnings Wednesday, April 16. In Q4, 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. The company reported a 17% year-over-year increase in consolidated revenues to $16.86 billion. Google’s core revenues (excluding Motorola) grew by 22% to $15.70 billion. In this earnings announcement, we expect the enhanced campaigns program to once again drive revenue growth across its mobile and PC search ad divisions. Furthermore, as YouTube continues to gain popularity, we expect display ad revenues to be higher.

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Revenues From Mobile Ads To Grow

The mobile search ads division is the second largest division for Google and makes up approximately 29% of its total value, according to our model. Google with 90% market share, dominates the mobile search engine market. In a note we recently published, we noted that Google’s mobile division will fuel revenue growth in 2014. Even though mobile search ads are expected to only generate 14% of the company’s total revenues in 2014, we expect this figure to reach to almost 25% by 2020. In Q3 2013, as the multi-platform enhanced campaigns program came into effect, it was instrumental in increasing the aggregate paid clicks, which boosted the number of ads sold by 31% in Q4 2013. This program stimulated the demand for mobile adwords, as advertisers were bidding more frequently for them. We expect this trend to continue in Q1 as well, and the company to report growth in mobile ad revenues.

Cost per Click To Affect Search Ads Revenues

We currently estimate that PC search ads contribute approximately 35% to the firm’s value. The company, with a 65% market share, dominates the PC search engine market. The cost per click (CPC), a metrics that measures the price paid for the number of times a visitor clicks on a search ad, has been on a steady decline for the past few years. As a result, company’s top line growth from search ads has failed to capitalize on the growth in search volume. Furthermore, the recent trend indicates that over 50% of the web traffic is coming from mobile devices. As advertisers realign their ad budgets in favor of mobile devices, chances are that desktop revenue per search (RPS) will suffer. Therefore, we expect the downtrend in RPS (also known as CPC) to continue in Q1, and the company to report lower RPS. Currently, we project RPS to decline from $23 to $22 by 2020. However, we expect ad revenues to grow in absolute numbers, buoyed by growth in search volume.

Video Ads To Boost Revenues From YouTube

According to our estimates, YouTube contributes approximately 7% to Google’s value. According to comScore, Google is the market leader in the online video content industry with nearly 157 million unique viewers as of January 2014. ^[1] 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 $4.7 billion in net revenues in 2014, and believe it will reach around $18.7 billion by 2020. In this earnings announcement, we will closely monitor the number of user generated videos uploaded to YouTube, and the number of unique visitor to the website.

We currently have a $547 price estimate for Google, which is in line with the current market price.

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1. comScore Releases January 2014 U.S. Online Video Rankings, February 21 2014, www.comscore.com [↩]