Wedbush Securities analysts Shyam Patil, James Dix, and Andy Cheng lay down their expectations for Google Inc (NASDAQ:GOOG)’s 4Q results.

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Google 4Q earnings

We expect Google Inc (NASDAQ:GOOG) to report a strong 4Q with likely upside to estimates. Our checks and industry data point to healthy 4Q paid search trends. However, with the stock up ~30% since the 3Q report (vs. the S&P of ~6%), we believe shares are most certainly anticipating a strong quarter, and thus we are maintaining our NEUTRAL rating, as we await a better entry point.

4Q13 Expectations

Google Inc (NASDAQ:GOOG) is scheduled to report 4Q13 results on Thursday, January 30th after the market close. For 4Q13, we estimate Google Inc (NASDAQ:GOOG) net revenue of $12.04 billion (23% y/y vs. 23% y/y in 3Q13 and 21% y/y in 4Q12) and total net revenue (including Motorola Mobility) of $13.40 billion vs. Bloomberg (BB) consensus of $13.47 billion. We estimate non-GAAP EPS of $12.20 vs. BB consensus of $12.32. For core search, we are modeling 26% y/y click growth (vs. 26% y/y in 3Q13 and 24% y/y in 4Q12) and a 9.3% y/y decline in CPCs (vs. -8% y/y in 3Q13 and -6% y/y in 4Q12).

Constructive 4Q13 Paid Search Commentary

Overall, our checks and industry data points from search engine marketers (SEMs) suggest healthy paid search spending trends for 4Q, with modest acceleration in y/y growth from 3Q. We are modeling core Google gross advertising revenue growth of 16% y/y (vs. 15% y/y in 3Q13).

Enhanced Campaigns (GEC) and PLAs Appear to be Becoming Additive. While it is still early days, our checks indicate that GEC is becoming additive for overall spend (vs. previous commentary in 2Q that it was generally non-additive). Additionally, our checks suggest that GEC could help drive more longer-term growth for Google Inc (NASDAQ:GOOG) through improved efficiencies (which can then be reinvested), opening up new pockets of spend (such as geo-targeting), and improved measurement (which may support additional spend). Additionally, our checks are starting to view PLA spend as incremental, which is a change from previous commentary that it was cannibalistic. Generally, our checks indicated PLA spend was up 30-80% y/y in 4Q.

Valuation

We are raising our target to $1200 (from $980) based on ~20x our 2015 non-GAAP EPS estimate of $60.87 (or ~16x P/E excluding cash and interest income), in line with Google Inc (NASDAQ:GOOG)’s historical 12-month forward P/E multiple range of 12x-22x (mean of 16x) over the past two years.