Google Shares Jump on Earnings, Fully Valued at $600
Google (NASDAQ:GOOG) recently announced its Q2 2011 earnings on July 14th 2011. [1] For the quarter, total advertising revenues surged by about 33% over Q2 2010 values driven by increased paid clicks as well as higher cost-per-click rates over the same quarter last year. While operating margins have taken a hit in 2011, we believe reduced traffic acquisition costs (TAC) in future should provide a sufficient EBITDA upside in future. Google continues to dominate the online advertising business over competitors such as Microsoft (NASDAQ:MSFT), Yahoo (NASDAQ:YHOO) and AOL (NYSE:AOL).
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Our revised price estimate for Google stock stands at $596, which is roughly the same as the current market price. We have adjusted the price based on higher revenue projections for Google’s search advertisements business as well as adjustments to EBITDA margins. Stock estimates have also varied based on change in net cash/debt positions over last quarter.
Search Advertisements Rise High over Competitors
In its Q2 2011 earnings release, Google reported increases in both aggregate paid clicks and cost-per-click, which grew by 18% and 12% respectively over Q2 2010. The rise is partly attributable to faster searches through the Google Instant feature, [2] which is designed to reduce 2 to 5 seconds in overall search query time. In our Q2 earnings preview note on Google, we highlighted the threats to Google’s worldwide search market share, which included the Yahoo-Bing search alliance and the Microsoft-Baidu web partnership in China. [3] While we believe these threats still exist, the Yahoo-Bing search alliance is yet to yield expected RPS (revenue per search) results and Google seems to have capitalized on this delay.
Android Operating System shows Strong Promise in Future
The significant rise in advertising also reflects the success story of Google’s Android OS (operating system) for mobile devices. The Android is the fastest growing OS for the smartphone market and is expected to capture almost 50% market share in this segment by 2012. [4] We expect this mobile platform to act as a significant competitive advantage for Google’s search market share in future.
Google’s ability to maintain this impressive growth while controlling its operating expenses in the medium term is the main reason why our valuation is not higher. We will discuss this in a subsequent note.
See our complete analysis for Google
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