Its a Very Bright Future for Google

Google Analysis & Price Target

The day has finally arrived.  Later this afternoon Google will report first quarter results for the three months ended March 31, 2010.  There are four items that I will be paying close attention to:

1)      Q1 Revenue:  My estimates show overall revenue of $6.97 Bil with $1.81 Bil of Traffic Acquisition Costs (“TAC”), leaving a net revenue figure of $5.16 Bil. 

2)      Q1 EPS:  I’ll be looking for EPS at $6.61 versus The Street’s estimates a week ago of $6.56. 

3)      Provision for Income Taxes:  While on the surface this may not seem like a very important figure, I can attest to the fact that it is a rather difficult number to estimate.  I’m expecting it to come in at $0.628 Bil.

4)      Handset Performance:  I’ll be reading Management’s Discussion & Analysis (“MD&A”) and listening to the Conference Call to get a better idea of how well Google’s handset business is coming along.  I’m expecting this area of operation to rapidly advance over the next couple of years.  This could really change the dynamic of the company and have a powerful effect on future earnings. 

Tomorrow evening I’ll be posting a summary of Google’s quarterly results with a brief analysis of their overall performance.  Also, if today’s results differ from my estimates, I’ll input the new data into the models and post any revisions that may occur.

Price Target!

1 Year Target  =  $730.97

The Street currently has an average 1-year price target on Google’s stock at $670.68, with a range of $536 to $810.  In reaching the target of $730.97, I first needed to find the stock’s multiple.  I took the current trading price of $589 and divided it by the sum of the last three quarterly EPS numbers and my current Q1 estimate of $6.61.  This gave me a Price-to-Earnings ratio of 25.94.  The next step involved estimating all four quarterly EPS figures for 2010 (Q1-Q4) to arrive at total forward-year earnings of $28.18/share.  Multiplying the multiple of 25.94 by the 2010 earnings estimate of $28.18/share yielded the price target of $730.97.        

Recommended Position

As a result of the following four important business and systematic factors, I am initiating a BUY rating on Google’s stock:

1)      Economic expansion is currently underway all across the world.

2)      Google is lowering its operating expenses, thereby increasing its operating efficiency.

3)      Google is transitioning into higher margin industries, like the Smartphone market, thereby lessening its dependence on online advertising.

4)      Zero debt and $25 Bil in cash and marketable securities leaves the door wide open for big acquisitions in the near-future. 

GOOGLE Ownership

Author:   NO

Author’s Family:  NO

Disclaimer:
· Opinions, estimates and projections contained in this report are of the author as of the date published and are subject to change without notice.
· This report is not, nor should it be construed as, an offer to sell or solicitation of an offer to buy any securities.
· Unless otherwise noted, all research reports provide information of a general nature and do not address the circumstances of any particular investor.

Google's Second Quarter Earnings Guidance

Google's Q2 Earnings Forecast

**Google will be reporting first quarter 2010 earnings after the closing bell on April 15^th**

Here are the guidance estimates for Q2…

Q2 Revenue:  $5.36 Bil

Q2 Basic EPS:  $6.76

Income Statement
Three Months Ended June 30, 2010
Revenue	$7,249,031
Costs:
TAC	$1,884,748	$5,364,283
Cost of Revenue	$797,393
Gross Margin	$4,566,890
Operating Expenses:
R&D	$751,863
S&M	$630,503
G&A	$489,346
Total	$1,871,713
Income from Operations	$2,695,177
Investment Income	$110,107
Income before Taxes	$2,805,283
Provision for Income Taxes	$648,814
Net Income	$2,156,469
Basic EPS	$6.76

As can be seen from the above income statement, I am expecting Google to post an overall revenue figure in the second quarter of $7.25 Bil, representing a 3.9% increase from my Q1 revenue estimates. 

The publicized revenue figure is sitting at $5.36 Bil.  This is factoring in Traffic Acquistion Costs (“TAC”) of 26%, which is right in line with each of the last four reported quarters.  Current Street “consensus” is putting revenue at $4.93 Bil, with a range of $0.5 Bil!  Thus, once again, I am forecasting revenue to be just above the upper range of analysts’ expectations.

Lastly, basic EPS is at $6.76 for the second quarter, up from my estimates of $6.61 for Q1.  This is a lot higher than what the Street is currently expecting.  Their estimates for Q2 EPS is at $6.45 with a range of $1.01!!  Once again, this wide range clearly shows that analysts are very uncertain about the next few months.  I happen to live in the Ozarks, where the weather can change dramatically from day-to-day.  As a result, our weathermen have the most difficult time predicting what tomorrow's temperature will be with any accuracy.  Ozarks weathermen remind me of Google’s analysts (with the exception of me, of course!).

Don’t forget to click “Follow” to the left of this post!

I’ll be adding a summary of my analysis for the “Every-Man” in the next few days.  It will be a simple guide detailing what to expect from Thursday’s announcement, including what the possible stock price reactions could be in both after-hours trading and over the next few months.  I’ll also try to get up a valuation model soon that will include my 1-year Price Target for the stock.

If you like what you’ve read, be sure to leave a quick comment.  It could be as simple as “Dude, you’re awesome.”  I’m just kidding, I’m really not that conceited.    

 

GOOGLE Ownership

Author:   NO

Author’s Family:  NO

Disclaimer:
· Opinions, estimates and projections contained in this report are of the author as of the date published and are subject to change without notice.
· This report is not, nor should it be construed as, an offer to sell or solicitation of an offer to buy any securities.
· Unless otherwise noted, all research reports provide information of a general nature and do not address the circumstances of any particular investor.

Q1 Earnings Estimates for Google

GOOGLE Q1 Earnings Estimates

*EPS and Revenue were slightly revised on April 11

**Google will be reporting first quarter 2010 earnings after the closing bell on April 15^th**

Alright folks, here are the long-awaited first quarter earnings estimates for Google…

Q1 Revenue:  $5.16 Bil

Q1 Basic EPS:  $6.61

Income Statement
Three Months Ended March 31, 2010
Revenue	$6,974,482
Costs:
TAC	$1,813,365	$5,161,117
Cost of Revenue	$710,042
Gross Margin	$4,451,075
Operating Expenses:
R&D	$743,586
S&M	$606,624
G&A	$476,869
Total	$1,827,079
Income from Operations	$2,623,996
Investment Income	$105,936
Income before Taxes	$2,729,932
Provision for Income Taxes	$627,794
Net Income	$2,102,138
Shares Outstanding	$318,032
Basic EPS	$6.61

As you can see from the above Income Statement, there is an overall revenue forecast of $6.97 Bil for the first quarter.  The accuracy table below summarizes the results of five particular regression models constructed to predict last quarter’s (Q4) overall revenue figure of $6.67 Bil.  First-order regression seemed to fit the sample data with relative precision; therefore, it was used to construct Q1’s overall revenue estimate. 

Accuracy
Model	Prediction	Percent Err.	W/ St. Err.	Percent Err.	R^2	Ad R^2
First-Order	$6,688,053	-0.2%	$6,998,433	-4.9%	96.7%	96.5%
Exponential	$5,965,543	10.6%	-	-	92.5%	-
Deasonal	$6,786,317	-1.7%	$7,132,136	-6.9%	95.9%	95.6%
Dummy	$6,819,703	-2.2%	$7,146,154	-7.1%	97.0%	96.1%
Lagged	$6,789,600	-1.7%	$7,130,050	-6.8%	94.0%	93.0%
		Actual Dec-2009 Sales
		$6,673,800

In order to arrive at the Traffic Acquisition Cost (“TAC”) figure, a combination of both regression and common-size analysis was used.  Estimated Q1 TAC represents 26% of estimated revenue.  This is in comparison to 25.8% of last quarter’s revenue.  The quarter-over-quarter deterioration is very minimal and is mostly a reflection of more revenue share being paid to Google Network members. 

           

Once TAC is netted against overall revenue, we arrive at the publicized revenue estimate of $5.16 Bil.  Current street consensus is for a netted revenue figure of $4.93 Bil, or 4.7% below my estimate. 

As we progress further down the income statement, we see investment income continuing to increase quarter-over-quarter from $87.7 mil to 105.9 mil.  This improvement is mostly attributable to fewer costs associated with Google’s foreign exchange hedging activities.  

Provision for Income taxes continues to be a difficult figure to predict, even for Google.  What we saw in 2007 an effective income tax of 25.9%, 27.8% in 2008, and 22.2% in 2009.  What the income statement above shows, is an effective rate of 23.0% for Q1 of 2010.  This is primarily a result of increases in federal and state income taxes, driven by higher taxable income. 

Lastly, we arrive at the Q1 EPS estimate.  Analysts, on average, are predicting basic EPS to come in at $6.56, or 0.76% less than the above estimate of $6.61.  This is not much of a surprise relative to an average EPS surprise of 4.56% over the past four quarters.

Over the next week, I will try to post Google’s Q2 guidance estimates, so be sure to check back often. 

Also, don’t forget to click the “FOLLOW” button to the left of this post for further analysis of all of your favorite stocks throughout the year!

GOOGLE Ownership

Author:   NO

Author’s Family:  NO

Disclaimer:
· Opinions, estimates and projections contained in this report are of the author as of the date published and are subject to change without notice.
· This report is not, nor should it be construed as, an offer to sell or solicitation of an offer to buy any securities.
· Unless otherwise noted, all research reports provide information of a general nature and do not address the circumstances of any particular investor.