Google Q2 2012 Earnings Preview: All Eyes On Mobile And Social

Jul.12.12 | About: Alphabet Inc. (GOOG)

Google (NASDAQ:GOOG) is set to reveal its earnings for Q2 2012 on July 19. The company has been aggressively pursuing other avenues, besides its core search advertising business, to drive revenue growth in coming years. It is focusing primarily on its mobile and social businesses to continue with its impressive rate of earnings growth in upcoming quarters.

In Q1 2012, it reported a steady increase in revenue and operating income, but saw a worrying fall in cost-per-click due to the rise in mobile search advertising. Google also completed its acquisition of Motorola last quarter and should start reporting combined financials, going forward. We will update our model to include Motorola's hardware business soon.

Check out our complete analysis of Google

Search advertising to continue generating tons of cash

Most of Google's side projects have failed, but its primary cash cow — search advertising — continues to generate a lot of revenue. We expect that to continue going forward as the number of searches and resulting paid clicks continue to rise, more than compensating for the decline in average cost-per-click.

Mobile search could change things

While the explosion of mobile has driven up search volumes, it has also resulted in a decline in average cost-per-click as mobile ads aren't as effective as standard online ads. Going forward, we expect the mobile search query volume to continue to increase as the number of mobile devices as well as the average number of searches per mobile device continue to grow. We also expect the average revenue per mobile search to increase in coming years as mobile ads are targeted in a better way.

Google is also trying its best to push Android and gain dominance in the smartphone and tablet markets, which could help boost its mobile search volumes. It recently launched the Nexus 7 tablet to beat the iPad, and continues to increase its lead in the smartphone space.

The future is social

Facebook (FB) is expected to become a major force in the online advertising space in coming years, displacing Google as the number one player in the space. While search ads have served Google well in the past, social ads could offer much higher ROI to advertisers, and offer a much better value proposition. This is exactly why Google is focusing heavily on Google+ and trying to integrate all of its services with the social glue of Google+.

Larry Page revealed that around 170 million users have upgraded to Google+, and that it is seeing impressive engagement and healthy growth. We expect Google+ to continue to gain traction, as Google ties it with all major Google products and services, and helps it improve its ad targeting using social data.

We currently have a $680 Trefis price estimate for Google, which stands 15% above its market price. Mobile search ads accounts for nearly a third of Google's overall value, while standard PC search ads account for another 38%. Google derives most of its value from advertising, a space where it competes primarily with Microsoft (NASDAQ:MSFT), Yahoo (NASDAQ:YHOO) and Facebook (NASDAQ:FB).

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