Google 2nd quarter results: Smartphone migration remains the monetization hurdle

A dictionary defines Google not only as a brand name for a global technology company, but also a frequently used verb relating to the search of almost anything imaginable.

Google headquarters
Source: Bloomberg

The innovation and access to information has created a tech giant which has become a household name engaging users both far and wide on a daily basis. The company is scheduled to release results for the second quarter of 2014 on 17 July.

In the second quarter of 2014  Google Inc. has made 13 acquisitions, keeping to the company’s trend of buying more than one company a week since 2010. The acquisitions aim to serve the purpose of both furthering core operations and adding diversity to the business. The purchase of mDialog and Adometry for example, should assist the online advertising aspects of the business while the purchase of Songza witnesses the emergence of a new focus towards music streaming. Apple’s recent multi-billion dollar majority purchase of Beats by Dre shows a perceived trend shift from music downloads to music streaming. The purchases and diversification curiosity are however likely to impact profit margins in the near-term. The Skybox Imaging (integration to Google Maps & Project Loon) and Appurify (Google Cloud) together have cost in excess of $1 billion for the quarter. Google does however have the luxury of nearly $60 billion in cash (as reported in Q1 2014) to absorb these investments comfortably.

Previous results show Google’s primary revenue stream to be sourced through advertising from its websites (68%) and partner websites (22%), while the balance of revenue (10%) is sourced through enterprise and hardware products. The US equates to 43% of earnings while 57% is sourced outside of the US.

The recent trend of significant revenue growth has been through Google’s website advertising as well as the non-core (balance of) revenue items. Google's network website advertising revenue has been more or less stagnant relative to the aforementioned. Revenue for 2014 Q2 is anticipated to be in the region of $15.6 billion which is 10.59% higher than the corresponding 2013 quarter and a marginal 1.16% higher than the previous quarter. 

The increasing migration to web access via smartphone rather than computer has imposed a somewhat stalling effect on cost per click revenue. Smartphones reduce the amount of advertising space a computer provides and investors will be looking to see the extent of the year on year effect of this phenomenon in the 2nd quarter, as mobile monetization will be the key driver of earnings growth long-term.

A mean of analyst estimates suggests that earnings per share for the company should be in the region of $6.25. It should be noted (as my colleague Chris Weston points out) that earnings have fallen short of consensus twice in the last four quarters. The knee-jerk reaction to the first-quarter earnings miss did however provide traders and investors alike an opportunity for long entry as weakness has been recovered in excess.

A Thompson Reuters poll of 44 analysts shows the company to remain in investor favour with no sell recommendations, 10 hold recommendations, 18 buy recommendations and 16 strong buy recommendations.

Technical analysis

The price of Google Inc A shares looks to be finding support at $580 level ahead of the upcoming results. The long-term trend remains up as gauged by the price trading firmly above the 200-day simple moving average (200MA). The price is expected to remain non-committal to a direction in the near-term in lure of the results release. Post the results outcome, keeping with the long-term upside bias, trend followers would look to accumulate should weakness occur, provided the price does not close below the confluence of the 200MA and horizontal support at $550.

Should the initial reaction to the results be positive, breakout traders would look for long entry in line with the uptrend above $595, with the recent high at $615 as a favoured resistance target.

Google 14072014

Google Inc. A

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.