Google (NASDAQ:GOOG) reports Q3 results on Oct. 18. The Street expects the following:
- Revenue: $11.98 billion
- EPS: $10.56 per share
- Q4 revenue guidance: $12.86 billion
Heading into the earnings, investors can expect multiple expansion and analyst re-rating of the stock as fear over social network competition lessens, Motorola Mobility (MMI) integration remains on track, and mobile continues to generate incremental revenue.
Google's stock price has been negatively impacted over the past nine quarters due to concerns regarding competition from social networking, uncertainty over MMI integration, and weak mobile ramp-up despite achieving 25% FX-neutral revenue CAGR over the same period. However, I believe that investors will realize that competition from social networking sites, such as Facebook (NASDAQ:FB), is not as severe as previously expected, MMI integration is on track and will likely be EPS-neutral in a worst-case scenario, and mobile revenue is having incremental contribution.
Concerns over competition from social networking sites were overblown. Over the past several quarters, investors feared that social networking sites could disrupt traditional online advertising with unique advertising products and potentially replace search as a discovery platform. However, I believe that social networks inflicted the most damage to traditional portal sites such as AOL (NYSE:AOL) and Yahoo (NASDAQ:YHOO) as users gradually shift their time spent from portals to social networking sites. Since social network and search engines both serve different purposes, coexistence between the two products will likely continue in the future. In fact, both social networking sites and search engines will continue to grow at the rate of Internet expansion around the world.
MMI integration is on track. Google's intention of winding down MMI's Home Division indicates that the company is only interested in MMI's patents and mobile expertise. Already having the Android software in place, Google needs to carefully integrate MMI's patents and hardware to position itself to compete effectively against Apple (NASDAQ:AAPL). I would note that several features on the iPhone 5 (e.g., a larger screen, lighter design, replay incoming call with a message, etc.) have been featured in Android and MMI products over the past two years, and I believe that the successful integration of MMI will make Google a formidable challenger to Apple in the mobile handset space.
Mobile CPC is achieving incremental contribution. According to management, mobile search queries rises during weekends and declines during weekdays. I view mobile revenue is mostly incremental to desktop revenue despite the fact that mobile CPC is still below that of desktop. However, mobile will likely to have meaningful contribution over time, given Google's effort to leverage Android and Chrome to maintain its presence in the mobile space and minimize TAC to third parties.
Google is currently trading at 15 times consensus 2013 estimates. Given the low execution risk, attractive valuation, and mitigation of investment concerns, I believe that further multiple expansion and an analyst re-rating of Google shares is a distinct possibility in the upcoming quarters.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.