Forget the Nexus 5 that just got leaked, the Moto X, or Google Glass, Google's main earnings engine is search and advertising. If the company is EVER able to figure out mobile advertising, its earnings power could be well in excess of $60 per share.
Last night, Google's (GOOG) third-quarter earnings showed it generated $10.74 per share in earnings, on $11.93 billion in sales, excluding traffic acquisition costs (TAC). Those numbers handily blew past the $10.34 per share in earnings analysts were expecting, but don't tell the entire story.
Google is working on Enhanced Campaigns (EC), which makes advertisers buy advertising on both mobile and desktop, instead of one or the other. That should allow them to see a better return on investment, and ultimately bring cost-per-click (CPC), a key advertising metric, up. Google said that CPC's fell 8% year-over-year, and 4% sequentially.
As advertisers become more comfortable with EC, the earnings power of Google is vastly unappreciated. Jefferies analyst Brian Pitz, who raised his price target to $1,150, wrote, "Enhanced Campaigns means marketers can easily run multi-screen ad campaigns (PC, tablet, mobile) - a key advantage for GOOG."
Assuming paid clicks, clicks related to ads served on Google sites and Network member sites, continue to rise at a healthy space, there's no reason why Google couldn't see $60 in annual earnings power, as EC becomes more prevalent amongst advertisers. Take into account that CEO Larry Page said 1.5 million Android devices are being activated every day, and it's easy to see how $60 in earnings power can happen sooner rather than later.
Paid clicks increased approximately 26% year-over-year and 8% sequentially.
JPMorgan (JPM) analyst Doug Anmuth, who raised his price target to $1,100, noted that EC most likely didn't affect third-quarter results, making it all the more impressive." Enhanced Campaigns does not appear to have had a material impact on 3Q results either way, but we believe it represents a major opportunity going forward as usage pushes toward mobile and advertisers increasingly utilize bid modifiers and cross-device analytics," Anmuth wrote in his note.
Deutsche Bank analyst Ross Sandler, who hiked his price target to $1,220 from $970, thinks "the worst is behind Google from a sentiment perspective, and looking into 2014, we see several catalysts," namely revenue from Enhanced Campaigns. He raised his earnings estimates by 14% following the report.
While Google gets a lot of credit in the media and on Wall Street for moonshots such as Project Loon (which Page had no update on), Google Glass, Google Fiber, driver-less cars and other projects, its bread and butter is still search and display advertising. Enhanced Campaigns will ultimately allow the company to increase its earnings power markedly, sending the stock to even further into the stratosphere than it already is.
Don't forget about the moon shots, either.