Your Cheat Sheet to Google’s 2nd Quarter Earnings

Google's Android stepping up in popularity.Downgrades into Earnings

Following Intel’s (NASDAQ: INTC) blockbuster earnings report, it’s now time for us stock market tech enthusiasts to turn our attention to Google’s (Nasdaq: GOOG) upcoming report.  The 2nd quarter of 2010 will go down in history as the quarter in which Google became a valuation play relative to its peers (yes, Google was a “value” play during the bust of 2007-08, but that was a time of equal opportunity hating across all classes of equities).  For the first time in its history as both a public company and a big tech bellwether, Google now trades with a forward p/e (based on consensus analyst estimates) of less than 20.

Many analysts have tempered expectations ahead of Google’s 2nd quarter report.  This is as much due to heightened macroeconomic volatility, as it is analysts concern over Google’s perceived inability to monetize on any line of business outside its core search and ad-based model.  JP Morgan (NYSE: JPM) analyst, Imran Khan cited slower sequential growth due to Eurozone weakness, the discontinuation of the Nexus line of phones, and FOREX hedging expenses in contributing to a slower overall growth rate.

Several analysts have expressed concerns over the lack of a foreseeable growth opportunity for Google revenues.  This stems as much from Google’s withdrawal from the rapidly growing Chinese market, as it does the failure of the Nexus to become a hot-selling end consumer device.  All in all, analysts are expecting earnings of $6.54 per share, on revenues of $5 billion.

Digging a Little Deeper

Analysts do a pretty solid job of projecting Google’s earnings from the search and ad-based revenues, as much of that data comes from comScore and cost-per-click data that is largely publicly available.  However, Google has historically been rather secretive about dividing its revenue sources into easily ascertainable information.  During the quarter, Google made it far easier for anyone to create advertising content on YouTube, and started implementing creative ways through which they can better value ads for their customers.

Several times this year, Eric Schmidt both hinted and outright stated that YouTube is on its way to becoming a profitable and integral component of Google’s overall strategy.  Google’s brass does a great job at tempering expectations, and Schmidt’s clue should be a hint to us all that at some point this year Google will unveil and earnings surprise.  I personally would not be surprised to see signs of YouTube’s profitability in this particular earnings report.

For a company engaged in an aggressive growth via acquisition and investment strategy, it is rather telling that Google’s $1.65 billion investment in YouTube is paying off.   Speaking of which, regulatory approval for Google to close on their acquisition of AdMob sets the stage for the company to turn the rapid uptake of its Android phone operating system into an earnings behemoth.  This acquisition sets the stage for Google to continue expanding their presence in the growing mobile advertising market, using their Android operating system as a catalyst through which to reach a growing market.

Oh, and about that Android uptake?  Well despite the Nexus One’s failure, the Android browser is soaring to successes beyond what any had projected.  In the second quarter, Android activations moved up to 160,000 phones per day, while the app market surged, growing from 50,000 total apps to 70,000 in the month of June alone.

HTC, a phone manufacturer which uses the Android browser in many of its top lines just last week announced stellar second quarter earnings, which far surpassed any analyst expectations: sales increased by a whopping 58% over 2q 2009.  This clues us into the fact that while much of the success in Android uptake has been a recent phenomenon, there should be actual signs of this trend in second quarter earnings for Google (Google doesn’t necessarily make money off of Android activations, they primarily monetize the Android via the Apps market and use of Google tools).

What I’m Looking For

Since earnings are inherently backwards looking, it’s not worth talking too much about the unveiling of GoogleTV.  What is clear is that analysts and traders are looking for the company to show some signs of significant revenue growth beyond the scope of Google’s tradition Internet ad model.  I want to see more clues that the YouTube and Android successes are turning into tangible profits for the Google.  Seeing this transition in the earnings is rather difficult considering the company’s secretive ways; however, should Google turn around and comfortably beat these tempered analyst expectations, it would be a great clue as to these new lines of revenues for the company.  Personally, I expect a beat considering the inability for analysts to project revenue growth in the Android and YouTube markets, two areas in which the evidence points to significant acceleration for Google.

Disclosure: Long GOOG

If you like the way Elliot thinks, check out his incredible resource for investors and traders the Tech Cheat Sheet. Subscribe in a reader