Home Technology Google Inc (GOOG) Play Store, Paid Click Growth Show Strength

Google Inc (GOOG) Play Store, Paid Click Growth Show Strength

Raymond James Equity Research analysts Aaron Kessler and Ben Cohen maintain an Outperform rating for Google Inc (NASDAQ:GOOG) upon reporting solid 4Q revenues.

Google Inc (NASDAQ:GOOG) reported solid 4Q revenues in its core Google business driven by strength across verticals and geographies. While Google did not provide many details on the announced divestiture of Motorola, we are positive given the continued significant losses at Motorola as well and less risk in our view over Android relationships with other major smartphone OEMs. We maintain our Outperform rating given our expectations for continued search strength, a strong mobile position, and attractive valuation (~20.5x 2014 Cash EPS). We increase our target price from $1,260 to $1,310 (22x our new 2015 non-GAAP EPS estimate).

Google’s 4Q13 highlights

Google Inc (NASDAQ:GOOG) net revenue (excluding Motorola and traffic acquisition costs) of $12.41 billion increased 26% y/y (vs. +23% y/y in 3Q) and was 3.3% above our estimate of $12.01 billion. Google websites revenues of $10.55 billion were above our/consensus estimates of $10.35/$10.52 billion while network sites revenues of $3.52 billion were ~2% above our/consensus estimates of $3.45/$3.47 billion. Motorola revenues of $1.24 billion were 3% below our estimate and 12% below consensus. EBITDA of $5.88 billion increased ~12% y/y and was slightly below our/consensus estimates of $5.95/$6.08 billion. Non-GAAP EPS of $12.01 was below our/consensus estimates of $12.27/$12.22.

Positives for Google

1): Google Inc (NASDAQ:GOOG) site revenues increased 22% y/y (same as 3Q despite 300 bp tougher comp. Google noted strength in retail, automotive, and CPG sectors as well as strength in APAC and southern Europe. 2) Paid click growth – accelerated to 31% y/y (vs. 26% y/y last quarter); 3) Licensing and Other revenues accelerated to 99% y/y (vs. 85% y/y in 3Q) driven by sales of apps and content in its Play store as well as Play hardware.

Negatives for Google

1) Motorola – revenues were $1.24 billion decreasing 18% y/y, and 3% below our estimate; 2) Cost-per-click – decreased 11% y/y vs. our estimate of -9% driven by forex, geographic mix, mobile.

Estimates and valuation

For 2014, we increase our revenue estimate by 1.6% and our non-GAAP EPS moves from $50.52 to $51.96. For 2015, we increase revenues by 1.9% and non-GAAP EPS moves from $57.39 to $59.48. Valuation: Our new $1,310 price target is based on 22x our 2015 non-GAAP EPS estimate of $59.48, at the high end of Google Inc (NASDAQ:GOOG)’s historical two-year forward P/E range (12-22x) which we believe is warranted given Google’s solid growth outlook and mobile performance.