Step Right Up and Place Your Google Q2 Bets

It's that time of the quarter again--time for the Google Quarterly Earnings Sweepstakes.  For the last two quarters, the IO reader consensus has been more accurate than the Street consensus, as well as a better reflection of what the Street's real expectations have been.  So here we go again...

As in the past, please submit your Q2 estimates for:

1) Net Revenue (revenue after deducting traffic acquisition costs)

2) The price at which the stock will open the following morning.

3) Your logic.

You may update your estimates based on earnings from Yahoo, etc., until 4pm on Thursday, July 20.  The winner will get his or her name in lights (on this blog) the following morning.

All things considered, this quarter has been a yawner for Google watchers.  No Three-Alarm-George comments knocking the stock down 20% in 20 minutes, no 5% appreciation per day, no massive announcements, no huge controversies, and...no new high.  I believe, in fact, that this is the first quarter in the company's public market history in which the stock has not hit a new high.  The stock has yet to really recover from the "earnings miss" in early January (which wasn't really a miss), and, since then, a few thousand hedge funds have moved on to more exciting pastures.  Still, if the company blows out its numbers this quarter, all will be forgotten and forgiven. 

Several analysts have issued earnings previews, with some suggesting that Google will crush its numbers and others being more cautious.  Safa's hanging in there with his $600 target and predictions of a blow-out.  Perma-bear Jordan Rohan is warning investors not to get carried away.  So, it's time to get your own voices into the game.

My thinking:

Net Revenue: The current Street consensus is about $1.6 billion, up 80% y/y, with a range of $1.45 (up 63%) to $1.68 (up 89%).  Even the highest estimate represents a continued deceleration of the y/y growth in Q1 (93%) and Q4 (97%), which is reasonable.  A deceleration to 63% (1.45B) would be an unmitigated disaster.  Even a deceleration to the purported consensus, $1.6B (+80%) would probably be a disappointment.

Stock Price: Having held essentially flat for six months, the stock is gradually becoming less expensive, at least on an earnings basis.  As previously described, however, my free cash flow estimate has not budged in a year (bad news, given the huge revenue growth), and the stock is now trading at about 40x-50x a 2006 free cash flow estimate of $2.5B to $3B.  This is a vast improvement over the 70x-80x multiple when the stock neared $500, but it's still hefty.  So there's still no room for error.

So my own entries in the sweepstakes are:

Net Revenue: $1.66 Billion, up 86%.  I haven't seen any changes in trends that lead me to expect the company's growth to hit a wall, and some of the Comscore query numbers suggest that Google rate of share gain is increasing.  Similarly, however, I haven't seen anything that makes me think the company will shock everyone on the upside.  Those days, I think, are gone.

Stock Price: $420  The stock's still expensive, the broader market is weak, a $1.66 billion number would qualify as strong but not spectacular, and I see no reason for the multiple to expand.  Also, Google has now posted about 20 quarters in a row without a real stumble, and each strong quarter brings us one quarter closer to that inevitable day when even the best companies screw up.

Look forward to reading your thoughts...

Comments

[New troll in town]

F U K T

[KING TROLL]

Got me . Bitch i was on all morning too.

[Stock Market Beat]

I will go with the street-high 1.68 billion, on the logic that if Y/Y growth was down 4% in Q1 it will do the same in Q2. Whisper numbers will be in-line with this, so the stock will do little on the news.

[TheShadow]

$1.57B

$392

[bellerose]

1.49 billion
345

and by the way take a peek at Mark Cubans' blog....two interesting articles
1- on the Internet as a whole
2- CLICK Fruad

[Mattydread]

$1.50B. Advertisers are moving less $ from other areas into GOOG as they're becoming aware of click fraud; existing GOOG advertisers are seeing their ROI drop because of click fraud and may move spend elsewhere, including to Microsoft's alternative (adCenter), launched in Q2.

350 as the street realizes the no-competition heavy-growth days are over.

[singh]

rev 1.54 Billion

open 367

[sonicjuice]

Net Rev: $1.695bn - Very bullish on the revenue (I think Yahoo will post great numbers too).

Stock Price: $418 - Undervalued I believe BUT I think it will take a few quarters of solid revenue figures to convince the street to get bullish on GOOG again.

Overall, I'm expecting GOOG to hit >$500 within the next year. ;->

[Gabriel Dubois]

Net Rev $1.716b
12% sequential rev growth - 200 basis points higher than Q2 05 -
reflecting continued market share increases & continuing monetization improvements

Stock opens at $440 based on non GAAP eps of $2.51

[Pete]

$1.62
$375

my logic: i still think the next thing that hurts this stock is not a big net revenue miss, but either (i) further down the income statement or (ii) something qualitative like schmidt leaving, a big click fraud writeup somewhere, or another loose comment from mgt. some of that could happen in the release/on the call. i was wrong on this last quarter, though.

[Robert]

$1.55

$295

The general economy stinks and is getting much worse. Retail sales
are beginning to plunge. Click fraud. Housing boom has been over for a year.
Then there is the Mideast situation and George W Bush Presidential disaster.
Watch out below for GOOG and the market in general.
To paraphrase someone: you never get a crash when everyone is prepared.
You never get a liquidity crisis when there is no money around. Hedge funds and buyout funds and their clients are in a major danger zone.

[Victor]

1.64 - 1.65

ps Has anyone given thought to who actually gains from AOL going from subscription to an ad base free content model? Google!!

Even tho the estimates aren't blowing away the street, they will be a big success for Google if they meet them becaus analysts became extremely bullish on goog last quarter and their estimates reflect this. A meet will be a good sign for the business

[Victor]

pps I think it will open at $400.
The bigger problem for the stock is the macro-economic picture. With rates at 5.5+ and oil at $75+ it's going to be hard for a large movement up. However, if the macro picture improves goog will break through $500 in quick measure.

[khabri]

We need a bold analyst, (certainly not you Henry, you are a Banned and a disgruntled analyst) to come and tell about the decline and fall of Google.

Check out their own forum http://groups.google.com/group/adsense-help?hl=en for how many innocent people have been booked under click fraud and accounts suspended. Google adSense is a big scam. The bubble will burst soon.

[Tim]

1.9b

435

[Kiran Kini]

Net Revenues $1.45 billion
Increased Traffic acquisition costs and more policing of click fraud should decrease 2nd qtr revenues. Not sure how they account for the deals with PC manf. If expensed, could have a bigger impact on net revenue. On the positive note, could be a pick up from the gain on sale of baidu.com shares...Seems like Schmidt pulled a veteran trick to try to shore up the numbers, I am excluding that from my Net revenue #. Given options expiration, stock shouldn't do much will open @ 370 and trade in a range.

[SanMan]

Rev $1.7B
Stock: $435

[justaguy]

I think Goog will tank, but tomorrow I think Yahoo will soar after its earnings. Why? This is the first quarter that Yahoo has really opened up its Yahoo Publishing Network for everyone to join. (its the same thing as adsense, but without as much clickfraud)

Remember, Google gets half its revenue from adsense. Up until this quarter, Yahoo was missing that half- it had no way for individual websites or blogs to place ads.

But now they do. And if Yahoo starts to take even a tiny percentage of that publishing traffic and revenue, the numbers might TOTALLY surprise all the analysts.

Reason? The above two paragraphs are completely beyond the comprehension of your average wall street analyst who is paid to look pretty and/or sign his name to a sheet of lies that upper management wants the public to see in order to pump a stock.

NOT A SINGLE ANALYST ON THE STREET has mentioned that this is the first quarter for Yahoo's Adsense clone. Not a single one.

Why is that? BECAUSE WALL STREET IS STUPID.

Also notice that insider sales at yahoo have almost completely stopped over the last 2 months. Why could that be? Maybe because they know the price is about to get a lot higher? Hmmm.

[BDG123]

I don't really do alot of work as it pertains to earnings but as I said on here before, Google is headed to $170ish as a first stop. Yahoo, $16-20ish. Now those price targets won't be hit overnight. In fact it may take a year but I'm relatively confident they will be hit.

Buying pressure has already changed the landscape from how well these stocks acted in 2003 and 2003. There is alot of dumping going on. What do I get if these price targets are accurate? A Quarter Pounder with cheese?

[TallTroll]

You may like to consider Googles recent move with respect to the AdWords program, making massive (up to 2000%) increases in minimum bid prices for "low quality" landing pages. Given that Google are refusing to explain what "low quality" actually entails, and are introducing their own CPA product, it smells like they are prepping to enter the affiliate marketplace.

I think the short term effect will be to lower revenues, but may provide a step change increase in revenues in the longer term

[Alexander]

Opening around $360-370...this will be the start of an impressive down trend

[Josh]

Rev: $1.7
P: $385

Should be priced @ $180

Food for thought:

- Gmail is the strongest web-based email
o I have never clicked on an email-based text Ad
o I would pay-up for a fee-based Gmail
- Yahoo and Ask search are on par with Google in terms of search quality
o I almost use Google exclusively based on habit
o I have never purchased a single product after clicking on a Google text-based Ad
- Froogle is (still) a weak product offering
o I use Pricegrabber
- Bc of Ajax Google maps and Gmail are best of breed
o Without Ajax where would Google be?

In the end Google is a strong brand and has first mover advantage in a growing market place. A lot of smart people work for Google. Understanding the positives of Google is easy.

The negs of Google

A few negatives are non-diversified revenue stream in a changing marketplace, black box bidding system, Adsense click fraud, inability to integrate products….and the list goes on

Gmail has a moat. An email account can’t be transferred like a mobile phone number can from one carrier to another….but what happens when a small startup brings to market a disruptive technology that provides a better search then what Google can offer…Google search has no moat….99% of Google’s revenue stream is currently at risk…how much should it be discounted?

Google’s current business model makes them a lot of money…but how effective is it for vendors? I believe in the pay for purchase model not the pay for click (a balance of pay for purchase and click may work)…But is a search engine effective in instrumenting a pay for purchase model……

My process for purchasing a product:

1. Search Google to see what’s available
2. Search Google for a niche website that gives good opinionated buying advice (i.e. www.dpreview.com for digital cameras, Cnet is not very good)
3. Enter the model numbers into Pricegrabber and purchase product.

Where does Google fit in?

[Victor]

Good work justaguy, both your reasoning and your conclusion are dead wrong. Take a look at yahoo now. You're also wrong on goog.

[albert]

Revenue: $1.61 B
O.Price: $385

Reasoning - Where YHOO goes, GOOG will follow. Bearish sentiment pervades the market and now the ad sector as well.
If GOOG just barely beats the estimates, meets the estimates, or misses estimates, then the stock will go down. GOOG will need to beat the analyst estimates big time in order to maintain current uptrend and I don't see that happening.
Any and all catalysts to boost up the stock are now gone.

[sigma]

For your

"Also, Google has now posted about 20 quarters in a row without a real stumble, and each strong quarter brings us one quarter closer to that inevitable day when even the best companies screw up."

apparently the actual situation is surprising:

Consider a really simple case, coin flipping: That one has had 9 heads in a row does not mean that they are "closer to that inevitable day when" we they tails.

There are many more such cases.

E.g., if 'real stumbles' arrive at points in time and if the increments over time are stationary and independent, then there must exist some number r >= 0 such that, for k = 0, 1, 2, ..., the probability of exactly k 'real stumbles' in time interval of length t is exactly exp(-rt)(rt)^k/k!. The number of stumbles so far at the beginning of the interval of length t is irrelevant.