Google's Earnings Will Surprise on the Upside
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Two straight earnings reports from Google defied the gravity of Wall Street's expectations and sent the stock up like a hot air balloon. Last quarter, however, Google (NASDAQ: GOOG) underperformed despite its core revenue driver, search advertising, seeing an increased number of clicks.
The increase was offset by a lower average cost per click (an 8% decrease compared with both Q4 2010 as well as Q3 2011), which led some analysts to believe more search was being done via mobile phones for which Google cannot charge as much, as clicks led to fewer sales. Some analysts believe that if the trend towards mobile search versus desktop continues, Google's long-term profitability will be eroded.
I disagree with this assessment, as more and more targeted ads will be delivered in the future, based not only on the GPS-tracked location of the phone and Google Plus user data, but based on the idea that buying something on your mobile phone in the future will likely be as easy as buying on your desktop today. Further, this assumes that security can win the war against the hackers, which is still up in the air (but generally the direction the human race moves in).
Additionally, the numbers for the last few months showed Google edging upwards in overall search market share with an economy said to be in "recovery."
While clearly, Apple's (NASDAQ: AAPL) iPhone 4S was a hit, the overall numbers of Androids activated should be robust. Microsoft's (NASDAQ: MSFT) Windows 8 Phone isn't out yet, and though it poses a potential future competitive threat, the current quarter will show Android obliterating the competition in terms raw usage numbers.
Google recently stated 850,000 new Android devices are now being turned on and activated each day, while the current number of active Android smartphones and tablets has topped 300 million. Also, the Android Market has just crossed the 13 billion apps downloads milestone.
Additionally, coming in September, Google is due to release their answer to Siri, called Assistant (formerly Majel), which according to preliminary research I've done (consisting of rumors and forum chatter) will kick Siri's butt. Of course, there is no doubt Apple continues to work to improve Siri, so Google is shooting at a moving target here, but they will answer, and answer strongly.
Here is where being immersed in a company and doing business with them pays off. I strongly believe YouTube revenues are going to be boffo for Google, and well beyond what they were last quarter. Why?
Well, I produce short videos (which are available on my site link below), and awhile ago, Google started to display hyper-linked ads in the lower portion of the video that were derived from the labels and title of the video. I saw a saw a certain percentage increase in my earnings.
Reader: "What percent?"
Me: "Zero...What? Zero is a percent."
Unimpressed? Well, this quarter Google introduced "TrueView in-stream ads" where a commercial plays before the video every time you watch X amount of content. While I really don't earn much, it has shown a sizable percentage increase in earnings for me (yes, greater than zero) as well as for many of my amigos on the Google/YouTube message boards, who are very excited about their new prospects.
When Groupon spurned Google's buyout offer, Google chose to create their own coupon/deals company. Frankly, as a shareholder, I am happy the way this turned out, as they were willing to shell out six bills (billion today, remember when "a bill" was slang for $100?! Talk about inflation) ... for a company with very low barriers to entry, with traffic, which Google dominates, probably being the biggest barrier.
Incidentally, before writing this column, I bought a dry cleaning deal for $25 via Google Offers. Sure, this is a small project and a drop in the bucket for Big G, but it all adds up. Plus, I am absolutely certain they have spent way less than 6 bills so far with Offers.
Google the Portal
Google has started to make slow deliberate moves in becoming more of a portal versus straight search, not wanting to shock users with an overly massive change to their famously simplistic and economical homepage too quickly, kind of like slowly turning up the water when boiling a frog.
While the recent introduction of Google Play (music, apps, videos on demand, video games etc.) will have little if any affect on this quarter, it is just another example of the changes CEO Larry Page is making at the company, and how Google is trying to stay nimble. Look for in the future Google to start devouring Yahoo's (NASDAQ: YHOO) market share, as well as what little AOL has left. In fairness, however, at least AOL (NYSE: AOL) recently embarked on a patent troll exercise and earned a "bill" doing so. It's stock went up around 30% on that news today.
Google has never been afraid to spend money to bolster its position in the market place. Those in charge aren't bean counters, and frankly, while I applaud their long term thinking and willingness to take risks, there is bound to be some Wall Street analyst crying, trying to make waves over it.
With a secretive company like Google, expenses are anyone's guess, but on the revenue side, my prediction is a pretty stellar quarter. And if YouTube numbers don't come in way ahead of prior quarters you can have a certain percentage of my net-worth. Yes, zero is a percent.
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