Google Earnings Preview: Third Quarter Looks To Be Strong

By Sean Udall  OCT 13, 2011 3:00 PM

If we see a revenue beat more than 3-4% and/or an EPS above $9, the stock could see a move north of $600.


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So what will Google (GOOG) bring when it reports -- a big beat like last quarter, or good but muted reports like the two preceding last quarter which turned into pretty big bouts of selling?

Or do the actual raw numbers matter as much as other factors?

In short, the numbers always matter, and expectations are running a bit higher into this quarter. I'm already on record saying the quarter is going to be strong, so I'm not backing away now. GOOG will probably have to beat the revenue line by a couple percent and maybe hit the $8.90s to see an immediate response in the after hours session like last quarter. If we see a revenue beat more than 3-4% and/or an EPS above $9, I think the stock might see a move north of $600.

Just for review, Google's third-quarter net revenue is expected to increase 32% to $7.21 billion from projected year income with earnings per share of $8.74. That is a very strong revenue projection for a stock with a below-market PE on a forward basis. But this is how world-leading growth stocks are valued these days.

What I view as more important (longer term) is the interpretation of Google's growth drivers and any insight that provides clarity that these strategies are working -- such as any further clues into Android monetization, Chromebook traction/sales, other mobility drivers, the Chrome browser explosion, enterprise App's traction (Google Docs suite) and of course any color on the Motorola (MMI) deal. Now, I doubt much if any of this is going to be answered very directly, though a couple things may be. I will be interpreting several tea leaves on the impact of the above.

As for the core of Google -- search business and display (YouTube and other) -- I think it will be more than solid. The question is how much are some of these other drivers bleeding into the results now. In my view, we started seeing signs of growth two quarters ago.

The area GOOG may provide more clarity is on the acquisition of Motorola Mobility, though I think its main mission will be to defend the whole of the Android community and to support the OEMs via this deal. If this mission succeeds, the stocks should see further traction.

The other area that may garner a bit more attention is Google+. I would be surprised if it doesn't highlight some total numbers and traction growth here. However, I also expect the company to talk about long-term potential and benefits of using the service. One thing my research has noted is that the Android growth is making Gmail a much more pervasive piece of GOOG's overall strategy. Many people have been exposed to Gmail but the Android exposure has made it a first and preferred choice for a vast and growing number of users. I see Google+ fitting in very well with a huge and still growing Gmail user base.

Bottom line, I am standing by my short to intermediate target in the $670-780 area, and longer term see much higher levels. As previously penned, I think the Android platform has the innovation curve and moxy to be the "Wintel" of the mobile space. I also think a Chromium footprint will fairly soon be embedded into the Android browser and thus produce a significant advancement as well as a competitive advantage. As for Chrome in the enterprise, this might turn out to be the ultimate Holy Grail.

From a trading standpoint, I have consistently added to this position on weakness and will do so again if given any post-report-related selling.

Twitter: @Udalltechstrat

Position in GOOG.

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