Google Q2 Earnings Preview: Revenue Growth To Continue

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Google (NASDAQ:GOOG) is set to release its Q2 2015 earnings on Thursday, July 16th. In Q1, the company reported that its revenues grew by over 12% year over year to $17.7 billion. However, cost-per-click (CPC), which has been declining for the past two years, continued to negatively impact growth. This decline was offset to some extent by the adoption of its enhanced campaigns program that combines ad marketing campaigns across mobile, desktop and laptops—i.e., across screens with different form factors. The program was instrumental in generating ad volume growth across the display and search ad divisions. In this earnings announcement, we expect the enhanced campaigns program and programmatic platform to once again drive revenue growth across its mobile and PC search ad divisions.

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Cost per Click To Effect Revenue Growth

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We currently estimate that PC search ads and and Mobile search ads respectively contribute approximately 33%  and  34% to the firm’s value. The company, with a 65% market share, dominates the PC search engine market. The cost per click (CPC), a metric 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. The primary reason for this has been both the advent of programmatic buying that matches relevant ads with content, as well as an increase in user-generated online content. As a result, company’s top line growth from search ads has failed to match the growth in search volume. Furthermore, most 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 believe the downtrend in RPS (a derivative of  CPC) to continued in Q2, and expect the company to report lower RPS, accordingly. Currently, we project RPS to decline from $23 to $22 by 2021. However, we expect ad revenues to grow in absolute numbers, buoyed by growth in search volume.

Revenues From Mobile Ads To Grow

The mobile search ads division is the largest division for Google and makes up approximately 34% of its total value, according to our model. Google, with 90% market share, dominates the mobile search engine market. One of the key reasons for this dominance is its flagship Android OS, which has witnessed excellent adoption and deep penetration in the smartphone market. A user with an Android phone is more likely to use Google search compared to a user using another OS. Considering the widespread use of Android based smartphones, we expect revenues from mobile ads will have grown at a robust pace in the Q2 of 2015. Furthermore, as the multi-platform enhanced campaigns program continues to evolve and Google continues to roll out more of its ads on its programmatic platform, we expect the aggregate paid clicks to increase and boost the number of ads sold.

Although Google continues to dominate the PC search industry, it has failed to as extensively monetize the mobile search market despite the popularity of Android OS. The primary reason for this has been the increasing use of in-app facilities within a specific app. For example, a user can easily search for a restaurant on Yelp’s app and decide whether to order from it. Recently, Google introduced deep linked application programming interface (APIs) for developers and marketers to purchase ads for app. The new tool will also help boost revenue for programmers developing Android apps and streamlines the process to promote applications (and its content) across Google search. We want to know how these deep links have improved developer experience and affected Google’s revenues.

Video Ads To Boost Revenues From YouTube

According to our estimates, YouTube contributes approximately 3% to Google’s value. According to comScore, Google is the market leader in the online video content industry. The primary reason for Google’s dominance in the video ads industry is its reach among users with nearly 162.14 million unique viewers as of May 2015. [1] According to comScore, Google sites are also ranked as one of the top video ads web properties in the U.S., reaching 31.7% of the audience. However,  Facebook is fast becoming a threat for Google. Video views on FB recently surged to four billion per day as compared to just one billion in September 2014. Since online video remains a fast growing segment within the overall digital ad market, we expect this to translate into high-revenue growth rate for the company. We expect that the unique user count for YouTube rose during the quarter, given the increasing popularity of this platform.

We currently have a $552 price estimate for Google, which is 5% above its current market price.

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Notes:
  1. comScore Releases May 2015 U.S. Desktop Online Video Rankings, June 19 2015, www.emarketer.com []