Google Inc (GOOG): Solid Q4 Likely – YouTube, Android Driving Revenue Growth

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Google Inc (NASDAQ:GOOG) continues to find growth outside its core search business. Near term, more prominent placement of PLAs may have helped Google Inc (NASDAQ:GOOG) show a slight acceleration in 4Q revenue growth. Longer term, analysts at Stifel believe Youtube and Android (Google Play store) both present viable and large growth avenues for the coming years. However, after a year of over 60% multiple expansion on declining consensus earnings estimates, shares appear fully valued.

Google Estimates Update:

Analysts at the research firm are increasing 4Q 2013E net revenues by $400mn to $16.4bn and EPS to $12.03. The revenue increase was driven by a $260mn increase in Google Inc (NASDAQ:GOOG) O&O and $150mn increase in Licensing. However, analysts still remain $400mn below consensus for the quarter on Motorala revenue, as Moto X sales were underwhelming (500k) despite considerable marketing efforts.

Google’s Android and YouTube Driving Revenue Growth:

The Play Store and Android platform are beginning to contribute meaningfully to overall gross revenue growth, particularly outside the U.S. where Android has higher penetration. YouTube benefits from strong secular trends as viewers shift online and advertisers seek to replicate reach lost on traditional media networks.

Solid 4Q Likely:

Analysts’ preliminary checks with search marketing channel partners indicate that Google Inc (NASDAQ:GOOG) had a good quarter — driven by Product Listing Ads, which now make up as much as 15% of total 4Q spend for the retail category. Core Google search appears to be growing in the ~10% range in the U.S., with mobile now delivering more than one-third of total searches. A stronger USD could limit upside otherwise likely in geographies outside the US and UK. Analysts reportedly will dig deeper into the full quarterly data in early January.

4Q Strength:

Google Inc (NASDAQ:GOOG) shares are up 25% since 3Q earnings (vs. S&P up 5%), driven by multiple expansion, not earnings upside. In fact, the stock has seen a 61% P/E multiple expansion despite a 22% earnings reduction to forward estimates since the start of 2012. With shares trading at 22x 2014E Proforma EPS and a PEG ratio of 1.8x, the shares look fully valued, if not vulnerable to a near-term sell-the-news reaction.

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