Google earnings

Last night, Google Inc (NASDAQ:GOOG) reported stronger than expected revenue and EBITDA in 4Q for its core business. Despite cleaning up some arbitrage revenues, Google’s core was up 12% Q/Q, slightly ahead of consensus. International organic revenue growth accelerated as expected, primarily from easier comps and favorable macro, which drove ~$100m of upside vs. analysts estimate. Mobile doesn’t appear to be as big of an “air pocket” as some expected, with CPCs up Q/Q and distribution TAC growth rolling over, both of which bode well for 2013 net revenue growth. Analysts from Deutsche Bank have largely maintained their estimates for 2013, as MMI’s divestiture offsets the 4Q upside. Shares remain Buy rated, firm’s price target remains $850.

Positive:

International revenues increased 26.7% Y/Y ex-FX, accelerating 210 bps vs. 3Q12, driven by strength in the UK and Northern Europe offsetting continued weakness in Southern Europe. Google Inc (NASDAQ:GOOG) website TAC increased 43% Y/Y, a modest deceleration vs. 3Q12, and an early indication that TAC is rolling over despite acceleration at Google.com. Stated another way, the bear case on mobile creating a huge “air pocket” for net revenue growth is diminished somewhat. Finally, core Google Inc (NASDAQ:GOOG) margins (ex- Nexus) were 55.1%, flattish Y/Y and up 90 bps sequentially.

Negative:

U.S. revenue growth decelerated 130bps vs. 3Q12 to +20.3% Y/Y (360bps ex- Nexus), largely a result of self-inflicted policy changes that are cleaning up certain partners. Analysts don’t believe the US weakness was from desktop declining, otherwise the same trend would be materializing in the UK growth rate (similar smartphone penetration). MMI continues to create noise around financial results, with negative margins, charges and the discontinued Home business. Finally, the lower tax rate contributed ~$0.43 to EPS upside, primarily from MMI deconsolidation and international.

Valuation

Analysts from Deutsche Bank have increased their consolidated 2014 revenue, EBITDA and EPS by 1%, 3% and 1%, respectively. Firm’s $850 price target is based on a blended average of 15x P/E, 20x EV/EBITDA and a 5% target FCF yield on its 2013 estimates, but note that the calendar flip is especially beneficial to Google as MMI gets cleaned up. Key risks include increased completion and regulation.

Google Inc (NASDAQ:GOOG) stock surged 4.94 percent to $702.87 in pre-market trading.