Google is scheduled to release its next earnings report on Thursday after closing bell, and investors may be especially riveted this time around as new Chief Financial Officer Ruth Porat will likely address them for the first time. She took over the post in May, and analysts are looking for some very specific commentary from her, like details on greater transparency, cost efficiencies and the growth trajectory of the core Search advertising business.
A call for more transparency at Google
In their report dated July 17, Nomura analysts Anthony DiClemente and Kevin Rippey made the case for increasing reporting transparency at Google. They would also like to hear more about discipline in the area of operating expenditures and capital returns. They think these three areas provide the greatest opportunities for Porat to make important changes at the search giant.
They especially think that if Porat can increase reporting transparency, she could create meaningful value for shareholders because it could trigger multiple expansion. Currently, the company trades at a discount of 11% to its past two-year average EV/ EBITDA multiple. Specifically, they think investors could become more confident on Google and its core growth rends if it provides “greater distinction between desktop search, mobile search, and YouTube.” (Graphs and charts in this article are courtesy Nomura.)
In terms of operating expenditures, they think the company could reassure investors about its earnings power on its core business, especially by breaking out “growth-oriented” expenditures. On the topic of capital allocation, the Nomura team suggests that Google’s $65 billion in cash could become more valuable if the company provided more details on its efforts and plans in this area.
Solid trends for Google
The Nomura team noted that trends in Google’s core Search business are healthy as pricing across all devices has shown improvement. Recently Merkle RKG reported an increase of 12% in Search spend on Google for U.S. customers in the second quarter. However, that’s still a year over year deceleration of about 100 basis points.
IgnitionOne reported a 69% increase year over year on mobile devices and a 5% increase on desktop. Nomura’s checks also suggest that cost per click across devices continues to grow, especially on mobile devices.
What to expect in Google’s earnings report
Bernstein analyst Carlos Kirjner, Ph.D. and his team want more color around the trajectory of search ad revenue growth. Another concern they have is whether Google’s capital intensity is returning to the level it was at before the first quarter of 2013. That’s when the search giant apparently started spending heavily on construction and real estate.
The Bernstein team is expecting Google to post revenue of $17.63 billion overall. They’re looking for $12.21 billion in Google Sites revenue, EBITDA of $6.8 billion, and capital expenditures of $2.29 billion. They’re projecting adjusted earnings of $6.78 per share, which is lower than the consensus estimate for this year but significantly higher than the 2016 consensus estimate.
Bernstein is expecting a headwind of about $1.07 billion due to foreign exchange rates. That’s interesting given a couple of firms’ suggestions that the slightly weaker U.S. dollar could provide a slight tailwind for tech firms’ earnings. For the full year, they expect a negative currency impact of $3.56 billion.
And here’s a look at how Nomura’s estimates compare to the consensus.
Nomura has a price target of $625 per share and a Buy rating on Google. Bernstein rates Google at Outperform with a $700 per share price target.
