Following a messy third quarter that saw Google Inc.?s results inadvertently released early, earnings decline 20%, and the stock fall 8% on Thursday, the investment case for the company appears to centre around one issue: mobile.
The shift of searches toward mobile devices continues at a rapid pace with roughly 20% of queries and paid clicks estimated to come from smartphones and tablets, according to JPMorgan.
Growth in mobile is a double-edged sword for Google. While it can take advantage of enormous growth, the shift from desktop to mobile search may bring in less money in the near term.
As a result, there are some investors who take the long-term view that Google is well-positioned to build a strong mobile ecosystem that drives more usage and could potentially rival the likes of Apple Inc.
Others believe the company?s transition to mobile advertising could lead to more disruption in both advertising revenue and margins than the Street anticipates.
Bank of America Merrill Lynch analyst Justin Post is in the latter camp, downgrading Google shares to neutral from buy on Friday.
He acknowledged that the company is well-positioned with an annual mobile revenue run rate of US$8-billion, up from US$2.5-billion in the third quarter of 2011.
While paid click growth slowed by 900 basis points on a quarterly basis, it remained strong at 33% year-over-year. This was driven by ad quality changes that resulted in higher paid clicks and greater mobile usage, Mr. Post told clients.
Google also pointed out that there are now more than half a billion activated Android devices and 1.3 million Android devices activated per day, up from 1.0 million in the second quarter.
While it did not disclose sales of the Nexus-7 tablet and does not recognize sales of the device through retail distribution at stores such as Best Buy and Staples, Mr. Post estimates sales were US$165-million in the third quarter and 825,000 tablets sold through Google Play.
As a result, the analyst raised his tablet estimates to 1.9 million in 2012 and 2.75 million in 2013, representing US$400-million and US$550-million in revenues, respectively.
On the downside, however, Google?s Website revenue missed estimates and margins were pressured by losses in the Motorola business segments.
?While Google provided some clarity on Motorola product strategy and restructuring on the call, lack of disclosure on mobile business will continue to provide more uncertainty,? Mr. Post said, noting the both Motorola Mobile and Motorola Home missed his revenue estimates.
JPMorgan analyst Doug Anmuth estimates that 70-80% of Google?s mobile revenue is derived through advertising.
?The bottom line for now is that mobile searches don?t monetize as well as desktop searches due to lower cost-per-click and higher traffic acquisition cost rates, so incremental volume has to become a more meaningful driver over time,? he said, cutting his price target on Google shares to US$802 from US$850.
The analyst raised his 2012 and 2013 gross mobile advertising revenue estimates to US$$5.63-billion and US$9.85-billion, from prior estimates of US$4.30-billion and US$6.67-billion, respectively.
Source: http://business.financialpost.com/2012/10/19/mobile-in-focus-for-google-investors/
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