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Google Inc. (GOOG) Fourth Quarter Earnings Preview

 January 18, 2013 09:59 AM

(By Rich Bieglmeier) Google Inc. (GOOG) is expected to report earnings after the market closes on Tuesday, January 22, 2013. Wall Street anticipates that GOOG will earn $10.61 for its 4th quarter. iStock expects the search GIANT will report earnings that will miss Wall Street's consensus number. The iEstimate is $10.24 – a 37 cents downside surprise.

Google is one of the most recognizable corporate names in the world. They are the leader for web search and pay-per-click advertising. If you don't know what Google is, google it.

Despite internet service provider's reputation as a NASDAQ high flier, the stock price has been somewhat subdued in the days surrounding quarterly checkups. In the last 16 quarters, GOOG shares have gained an average of 1.43%. However, things have been a little rougher as of late, losing value three of the last four quarters; dropping an average of 3.23%.

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Overall, in the last four years, Google has topped Wall Street's consensus estimate 12 of its last 16 EPS announcements. That being said, the stock price dipped seven of the 16 quarters.

Since you have to search to use Google, iStock figured we could look to internet traffic and search queries for clues on how Tuesday's earnings announcement might turn out. According to Alexa.com, web traffic in the 4th quarter of 2012 was lower than the 4th quarter of 2011.

However, Google Trends show that search queries for Google.com are up nearly 30% for October through December 2012 versus the same timeframe in 2011. For Q4 2011, NASDAQ 100 member earned $9.50, which was a dollar less than expected. GOOG lost 7% in the days surrounding the disappointing announcement.

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If Google Trends are accurate, then an upside surprise of up to $1.74 could be in store. But, since most of the company's revenue comes from ads, click-rates, not traffic, are the key. According to a white paper done by Marin Software, Inc., "US advertisers saw paid search click volume rise by 31% accompanied by a 38% increase in impression volume. The higher impression volume may indicate the continued growth of paid search as marketers shift more of their advertising dollars online." These results fit with our Google Trends review.

However, "Marketers saw a lower click through rate (CTR) year on year versus Q4 2011;" although, the average cost per click rose from 93 cent in Q4 2011 to $1.01 in Q4 2012.

Year-over-year, Google has lost ground to other search engines as a share of market for impressions (ads displayed), clicks and spends. Marin's report shows impressions dipping from 73% to 66%, clicks decreasing from 83% to 78%, and spends down to 80% from 83%. Meanwhile, CTRs were down 10% year-over-year (YoY) and 6% quarter-to-quarter for Google as shown by the white paper's graphs.

This makes for interesting math, search click volume up + higher average cost per click – lower YoY CTRs – loss of market for impressions, clicks and spends = Q4  earnings (roughly, anyway) When iStock ran the numbers for our formula, the result worked out to $10.41, above the iEstimate, but below the consensus. Investors will know how it all adds up Tuesday night.



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