Google (
GOOG
) recently announced its Q2 2011 earnings on July 14th 2011. For
the quarter, total advertising revenues surged by about 33% over Q2
2010 values driven by increased paid clicks as well as higher
cost-per-click rates over the same quarter last year. While
operating margins have taken a hit in 2011, we believe reduced
traffic acquisition costs (TAC) in future should provide a
sufficient EBITDA upside in future. Google continues to dominate
the online advertising business over competitors such
as Microsoft (
MSFT
), Yahoo (
YHOO
) and AOL (
AOL
).
Our revised
price estimate for Google stock stands at $596
, which is roughly the same as the current market price. We have
adjusted the price based on higher revenue projections for Google's
search advertisements business as well as adjustments to EBITDA
margins. Stock estimates have also varied based on change in net
cash/debt positions over last quarter.
Search Advertisements Rise High over Competitors
In its Q2 2011 earnings release, Google reported increases in
both aggregate paid clicks and cost-per-click, which grew by 18%
and 12% respectively over Q2 2010. The rise is partly attributable
to faster searches through the Google Instant feature, which is
designed to reduce 2 to 5 seconds in overall search query time. In
our
Q2 earnings preview note on Google
, we highlighted the threats to Google's worldwide search market
share, which included the Yahoo-Bing search alliance and the
Microsoft-Baidu web partnership in China. While we believe
these threats still exist, the Yahoo-Bing search alliance is yet to
yield expected RPS (revenue per search) results and Google seems to
have capitalized on this delay.
Android Operating System shows Strong Promise in
Future
The significant rise in advertising also reflects the success
story of Google's Android OS (operating system) for mobile devices.
The Android is the fastest growing OS for the smartphone market and
is expected to capture almost 50% market share in this segment by
2012. We expect this mobile platform to act as a significant
competitive advantage for Google's search market share in
future.
Google's ability to maintain this impressive growth while
controlling its operating expenses in the medium term is the main
reason why our valuation is not higher. We will discuss this in a
subsequent note.
See our complete analysis for Google