Google's (GOOG) stock has had a significant run-up over the past year and continues to hit new 52-week highs. The company is constantly expanding into new areas in order to offset the continuing decline in the cost-per-click ad market. While the company doesn't beat earnings every quarter, one thing is constant, the company always surprises. And not by a penny or two, but in two of the last four quarters the company surprised analysts by more than 13%. One of those quarters was on the upside and one a downside surprise. So with the market hovering around its recent highs and the economy on the road to recovery, will Google miss the lofty expectations that the market has placed on the company?
Despite what many people think, Google's business is surprisingly seasonal. Historically, there have been huge drop-offs in search engine traffic and therefore ad revenue, during the summer months. So only the same period from the year prior are comparable numbers. I'm sure one of the reasons that estimates vary so much, is the analysis of companies that have become as big as Google has is no small task. For instance, its exposure to foreign currency added $37 million to revenues in the first quarter of 2012. That number jumped to $81 million in the second quarter of 2012. While that gives analysts a range to work with (the company add $35 million in the first quarter of this year), it still makes it difficult to pin down an exact revenue number.
Another issue that makes this quarter particularly difficult to call is the sale of part of its Motorola unit. In April the company closed its deal to sell its Motorola Home business to Arris (ARRS) for $2.2 billion in cash and 10.6 million Arris shares. The business segment was profitable and generated revenues of $3.4 billion for the trailing four quarters ending September 30, 2012. In the fourth quarter of 2012, Motorola Home had a $35 million operating profit, however it had an overall net loss of $21 million which Google reported as discontinued operations. Also, for the remainder of 2013 including Q2, Google will have amortization charges of $807 million not related to Motorola Home.
On the plus side, over the past few years, Google's core business has been improving. The decline in average cost-per-click has been slowing and the amount of aggregate paid clicks has been increasing. The traffic acquisition costs, which is the portion of revenues the company pays out to partners, is also increasing but as a percent of revenue, has remained steady at 25% for the past few quarters.
Google's core search engine business increased its market share slightly from April to May, but remained flat year-over-year at 66.7%. This number does show considerable loyalty after last year's launch of Windows 8 by Microsoft (MSFT) utilizing Bing as the default search and a huge TV and internet ad campaign directed specifically at taking market share away from Google. The efforts did however help Bing gain 2% market share in May 2013 over the same month last year. The losers over the year turned out to be Yahoo (YHOO), going from a 13.4% share in 2012, down to 11.9% last May. Ask and AOL (AOL) also were either flat or saw a small decline.
Traffic to Google.com rose by 24% in the second quarter over the first quarter of this year. The cost-per-click market seems to be leveling off, Android led all smartphone sales in the first quarter with 64% of the market and despite reports of a slow March for Chromebook sales (less than 500,000 units sold), customers dissatisfaction with Windows 8 may be providing a boost to Google's competing operating system. So while the consensus estimates have been floating around the $10.79 level, I think Google beats on the revenue side and comes in at around $14.6 billion. Even with the restructuring at Motorola, the company can still put up earnings of $3.65 billion, for an EPS right at $11. I won't rattle off all the historical numbers that helped me come to this conclusion, but they can all be found here. I also believe, like many analysts, that Google sees $1100 a share by the end of the year.