Time For the Quarterly Google Craps Game

Okay, Google gamblers.  This one's going to be interesting. 

On the one hand, Google's modest deceleration last quarter suggests that the company is going to once again deliver (relatively) ho-hum results and disappoint investors conditioned to expect the astounding.  It takes a long time for a supertanker to change speeds or course, and, last quarter, anyway, it did seem that the Google supertanker was finally beginning to slow down.  This diagnosis seemed confirmed by possible canary-in-the-coalmine announcements from advertisers who were cutting back on search spending because prices had gotten out of hand.  And then there was CFO George Reyes' lucid mid-quarter explanation of why growth had slowed in Q4--because previous growth had been accelerated by a monetization program that had now run its course.  This convincing explanation kneecapped the stock for the eight hours it took for the company to issue a press release that said, effectively, George was wrong.

But the company did issue that press release--and that action, itself, along with the sale of $2 billion-worth of stock at the end of the quarter, probably provides a window into performance.  In the current regulatory environment, companies have to be beyond stupid to set their shareholders up to get killed, and since it would be easy to demonstrate that, guidance or no, Google probably knew whether its numbers were going to disappoint or impress, issuing the press release and stock if they were going to disappoint would be nuts.

In any case, its time for readers to place their bets. When we performed this experiment last quarter, you may remember, the collective assessment of IO readers proved an accurate estimate of what the market was really expecting (as opposed to the First Call Street analyst consensus).  When the company merely delivered the analyst consensus, therefore, the stock tanked.  Perhaps this quarter investors have successfully reined in their expections so an in-line number would be neutral or positive.  Or, perhaps, once again, for the stock to go up, the company will have to blow the Street away.

For reasons that, in my opinion, lack any basis in theory, Wall Street excludes not only pre-IPO stock option costs from pro forma EPS but also Google Stock Unit grants, a practice that seems both mindless and indefensible.  Google has started to go along with this convention, however, and the combination of this, plus wild tax rate swings and extraordinary expenses, has rendered the company's pro forma EPS numbers irrelevant.  As a result, we will once again confine our estimates to Net Revenue (the company's revenue once traffic acquisition costs have been deducted) and the stock reaction.

So, as with last quarter, to enter the quarterly earnings sweepstakes, please submit the following estimates:

1) Q1 Net Revenue

2) The price at which the stock will open the next morning.  (Last quarter, we asked for the percentage change from the previous close, but since we don't know what the stock will do between now and next Thursday, picking a price seems more fair).

To provide some context, the current Street consensus is $1.45 billion, up 82% from last year and 12% sequentially (with a range of estimates from $1.38 billion to $1.54 billion).  This compares to $1.29 billion, up 97% y/y, in Q4.  In other words, the Street is already expecting a significant slowdown in Y/Y growth.  The Street is also expecting only slightly more sequential growth in absolute dollars than in the Q4-Q1 quarters last year ($160 million this year versus $140 million last year.  This compares to $240 million from Q3-Q4 this year versus $150 million in the same periods last year--a much bigger jump).

For what it's worth, the above analysis suggests to me that the Street numbers are conservative.  My own estimate, therefore, would be $1.5 billion, up 89% year-over-year.  If the company posted this number, I think the stock would open around $400.  For the stock to immediately march toward a new high (above $470), I think the company would have post a number in the $1.6 billion-range, which would constitute a year-over-year acceleration.  Based on Google's previous performance, this isn't impossible, but I think it's unlikely.

The other thing I wonder is whether Google's accounting changes--and the resulting hit to cash flow--will spook investors.  Given Wall Street's treatment of GSUs, analysts will probably pro forma the changes away, but the performance of other stocks suggests that such changes matter.

Reminder: I don't own Google, this isn't investment advice, and your guess is as good as mine.  Actually, come to think of it, I do own Google--indirectly, in an index fund, which was just forced to load up on it.

Comments

[Uma]

hi Henry:
I am largely a silent observer and visit your blog daily. I observed one shift in the ad sponsors on Google. A few months back, I was seeing mainly small or internet only based companies as the top sponsors. Now these are replaced by large regular companies. This could mean several things:
1.the per click revenue must have increased as bigger companies would have more money to spend.
2. I am not sure if the total add revenue would increase though: When I am looking for a product say laders, if I see Home Depot at the top, I am not sure if I would click that link. I already know that they sell laders and I have seen them in their stores.

Uma

[Chris Fischer]

Guess: 1.58 billion, with international revenue growth accelerating. Stock reaction: up 12% to 440.

[Pradeep Bonde]

1.75 billion
Open price 475

[CDub]

1.57B
429

[Chetan]

Henry:

Your blog is reflecting your signs of aging. No offence. Think outside the box. Quarter after Quarter, Google has been performing well and their cash from search and advertising is growing faster than ever. Their is no single large competitor to compete against them. Insetad of envying them, try to cover what Microsoft and other giants are upto, maybe that will help readers.

[Johnathan P. Biznatch]

1.43 320

[Johnathan P. Biznatch]

I disgree with you, Chetan.
GOOG is about the only interesting stock in the tech world these days.
MSFT has not moved in years. AMZN stuck in a low margin world.

What you dont understand, Chetan is the world of Wall Street, especially intermediate term trading is all about expectations.

Henry, is not focusing on GOOG's earnings because they are good and growing rapidly. He is focusing on them more from an analyst perspective. A poor quarter by goog's standards is slightly slower growth and that is why trader types care about this stuff.

I imagine Henry gets way more traffic when discussing Goog than any other stock. Granted is interesting to hear some stuff on other companies but Goog is really the only company and stock acting like the old days.

[Victor]

1.54B
425

This is a great segment Henry. Keep doing it!

[Chetan]

He is focusing on them more from an analyst perspective. A poor quarter by goog's standards is slightly slower growth and that is why trader types care about this stuff.

Makes sense, but then GOOG is not very Analysts friendly. Henry has to do a job like Amr Awadallah did a quarter ago, maybe then it will be much more interesting.

[MattyDread]

$1.38B
320
Reason: downward price pressure on keywords. (Notable attempt to make up for this recently--minimum prices on some keywords recently skyrocketed.)

[Neal Lachman]

Chetan,

What do you mean in your first comment with henry "sign of aging"? Are you a teenager? If not, then act your age pal and don't insult people, especially not based on soemthing ridiculous as age.

I know 70 and 80 year old people who would make you cry in any category of business and any sector of life.

Anyways... to give my prestimate: $100B Q1 Revenue (that's a hundred billion USD) and the stock will open at $4,000 (four thousand). I hope this helps.

;-)

[P-]

"What you dont understand, Chetan is the world of Wall Street, especially intermediate term trading is all about expectations."

They're all varying artist of one degree or the other. There are bad ones, good ones and... great ones. Obviously it is game of dimishing numbers moving from one extreme end to the other but if you believe in the greatness of the idea, product or ware than evrything else falls in place.

[TheShadow98005]

$1.43B $437

[KK]

$1.3BB ...STOCK OPENS AT $340 AND RALLIES TO THE $360s... Diminishing Returns (or as Reyes said law of large numbers).... Dont forget the dramatic slow down in housing/housing application in the 1st qtr..... A lot of the high priced key words that saw large click through rates were housing related (loan application, re-finance etc...)..... Wouldn't be surprised if there is a sharp revenue short fall... Then again management has said time and again they don't care about share holders.....

And Henry, your argument that the press release and analyst day presentations argue for an upside surprise is just plain overthinking... how does one prove in a court of law that sequential growth of 25% is bad just because analysts were expecting 50%... especially after them having said that they are not interested in short term performance.....

[mtv200]

good.

[Johnathan P Biznatch]

P-
If your saying you can buy a biznatch (business in engligh) at any price just because they have a great idea, your wrong.
In the early stages this is probably true.
AMZN, YHOO were revolutionary companies but terrible investments by the time everyone had heard of them.
GOOG might have a great idea - but i will be shocked if this idea is still worth 120 billion in 5 yrs im thinking more like a quarter or a half.

[Dan Ghost]

$1.8B, and if they announce a 10:1 stock split then the opening price is not comuptable. Otherwise around $420...

[moom]

Don't have an opinion on revenues but my guesstimate for stock price next Friday is $380. This is the max pain options price. Looking at actual EPS, operating cashflow, free cash flow and any other metric over recent quarters I can't see the growth rate that can support such a high valuation.

[Larry Pumperowski]

If you think max pain has anything to do with where goog where we trading friday you probably should not be in the market.

[w]

"the company's pro forma EPS numbers irrelevant."

I still have faith in sanity and reason. GAAP EPS of $1.35 will be of relevence.
1.5B revenue and open at $370.

[strawberry]

1.42B
$370

[Gabriel]

1.566 net revenue [2.13 pro-forma eps]
opens @ $430

[Market Participant]

1.32 Billion. Why? Because GOOG's traffic acquisition costs have increased, while advertiser interest has decreased because of click-fraud. That has resulted in rot at the edges of the Adwords universe. The Viagra and Mesothelioma business is doing just fine, but for more ordinary key words open interest has gone down. This combines with fairly low CTR rates as web surfers just aren't clicking like they used to.

For my personal website @

http://gewinnvortrag.blogspot.com/

My earnings per click have gone down even as traffic has gone up. I did get a $1.96 click a few weeks ago, but I haven’t seen anything like that since. And investing tends to have pretty decent key word prices.

[Tel Aviv]

1.46B
$378

Whats the prize for the winner ? :)

[cougar]

It won't be about the number, it will be about looking forward, if revenue going forward shows any implied weakness, kiss it good bye, just beating the street is never enough for a sustained high share price.

GSUs, click fraud, accounting (taxes) etc. loom large for G$ and I expect a significant amount of analyst attention on those issues, any good news is already priced into this bomb.