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Google (GOOGL - Free Report) is expected to report fourth quarter results after the closing bell today and the company’s Zacks Rank #3 and earnings ESP of -1.02% make surprise prediction difficult.

Google has missed expectations in each of the last four quarters at an average rate of 3.6%. Also, the negative surprise has been increasing, with the last quarter highest at 8.05%.

The company also has some operating headaches related to heightened regulatory scrutiny and a pressure to diversify away from the shrinking desktop search market.

The Traditional Business

Its default search deal with Mozilla for the U.S., Russia and some other markets was not renewed last year with Yahoo winning in the U.S. and Yandex (YNDX - Free Report) in Russia. The default search deal with Apple (AAPL - Free Report) is also coming up for renewal and this could be a win for Microsoft’s Bing. According to Shareaholic data, Chrome and Android browsers have a usage share of over 40%. So while Google’s default search option on other browsers may be under pressure, it seems to be benefiting from increased penetration of its own browsers. Its also important to note that the default search option gets users to Google search faster, but no one is blocking Google search altogether, so it remains an option.

Another factor impacting Google’s traditional search business is CPC. While Google continues to see relatively high volumes and shrinking CPCs that management attributes to mix (geographic, device, property) and policy changes, we note that CPC declines moderated in each of the three quarters of 2014. If the trend continues, Google may see flat or increasing CPCs in quarter four.

Which brings us to the question of currency changes: Google derives a significant portion of its revenue overseas, so the stronger dollar is likely to affect pricing. Google does hedge the risk, so the effect may not be so great.

The fourth quarter is a heavy one for shopping, so Google’s product listing ads (PLAs) should play an important role.

Emerging Areas

Google devices (phones, tablets, wearables) and ecosystem have crept up on the market. While Google doesn’t earn a whole lot of money from these efforts yet, they supplement and complement the core business. The company had its fingers burnt with Samsung and now keeps its hardware partners as diverse as possible.

Chromebooks have steadily grown both at the enterprise and academia with new Dell and HP devices, mostly at Microsoft’s expense.

Google devices increase dependence on the Google ecosystem, driving more traffic to Google search and productivity solutions while also increasing sales on Google Play.

The company’s productivity apps are not as effective as Microsoft’s, but Google continues to strengthen its portfolio while increasing inter-operability and building its cloud computing capabilities.

Overall apps for Android recently eclipsed those for iOS and developers working on the platform are also higher. Apple still leads in revenue because the platform attracts more affluent users. A few factors could change this dynamic going forward: emerging markets playing a greater role that could allow Android apps to generate the kind of volumes that would offset pricing; each iteration of Google’s OS brings tighter integration making it easier for developers to target a larger number of devices; Google’s increased focus on security and quality; growth in Android devices worldwide. 

The Google Wallet continues to add partners and the company’s strategy in China makes it a worthy Apple Pay challenger.

If all these weren’t enough, Google is also taking measures to increase the speed and availability of the Internet through balloons and fiber initiatives.

It also has significant investments in robotics although the strategy for that initiative is not clear yet.

The latest rumor (although unsubstantiated) is that it will be offering wireless services.

So while Google’s immediate results might not be too exciting, we’ll be looking out for roadmap commentary and directional trends in the business.




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