Google's Going Under the Microscope

 | Jan 19, 2012 | 2:53 PM EST  | Comments
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orcl

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mmi

Google's (GOOG) earnings will be released after the close today. The options market is expecting a 5% move. Here's what to watch for in the results.

The company is expected to report $8.4 billion in revenue and $10.49 in earnings per share. The company beat by a wide margin last quarter, giving Larry Page a boost after the high compensation costs of Q1 last year spooked some investors. The wide beat seemed to suggest that all was well at Google.

However, there were some weaknesses last quarter beneath the strength -- flat index search, a big gain coming from the Kayak acquisition, and continued headcount growth. Had Google not had Kayak, its earnings results would have been materially weaker.

Google bulls brush off the importance of Kayak, saying that with Google's cash, it they can keep acquiring businesses to ensure earnings keep going up even if index search slows. Nevertheless, slow growth in the core business should continue to be monitored.

I expect Google to report strong growth in Chrome, YouTube, Android activations and mobile search. According to some court documents that have recently come to light in the battle between Google and Oracle (ORCL), we could hear that mobile search is generating a $3.5 billion annualized run rate in revenues at the moment, which would be much higher than prior quarters.

It will be interesting to see whether management says anything about re-entering China, and why HTC and Motorola (MMI) both saw such sharp drops in Android shipments in the quarter. Google does need growth (see earlier point above), and China is too big an opportunity to pass up. Even today, when Google is officially out of China, the company is generating two-thirds of a billion dollars each year in ad revenue.

On the Android side, it is worrisome that both HTC and Motorola dipped in the quarter. Why are they faltering and Samsung seems to be succeeding? How can Google turn this around?

Overall, I expect Google to rise close to its all-time high of $714 in the first half of the year before pulling back. I expect today's earnings to be good and help move the stock up.

The biggest risk to Google shareholders is if the Motorola deal is approved this quarter and does get integrated into Google as a subsidiary. Will the acquisition be a huge drag on the stock as investors react in horror to their numbers and it soaks up management's time?

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