Google on Track for Solid Quarter

SAN FRANCISCO -- Having doubted Google (GOOG) once before, only to be proven wrong, Wall Street has no doubts this time around that the tech giant will post solid second-quarter results Thursday after the bell.

"While we are optimistic about a strong quarter, we do not expect a material surprise like last quarter, which sparked a dramatic relief rally," according to Rob Anderson, an analyst for American Technology Research.

Cramer: Gotta Wait on Google

As usual, Google has not provided guidance for the second quarter, but analysts expect earnings of $4.74 a share on revenue of $3.87 billion.

Analysts see strength from overseas, as well as improvements to Google's search monetization. At the same time, the company may continue to experience a decline in growth for paid clicks as well as revenue, tempering some of the enthusiasm for the stock.

In the lead-up to the first quarter, analysts had been down on Google after the research firm comScore showed that the company's paid clicks -- the number of times users click on ads -- were flat in January. This came on the heels of Google's results for the fourth quarter, when it missed estimates and caused the stock to plummet almost 9% the next day.

Analysts began lowering their target price on Google, anticipating more bad news in the first quarter and conceding that the economy had finally taken its toll. But much to Wall Street's delight, Google posted an impressive first quarter, soaring past estimates and pushing the stock up almost 20% the next day.

This seemed to have allayed fears about Google's ability to perform in a down economy, although the company is certainly not without its issues. Shares now trade around $530 -- nowhere near their $700 levels in November.

"We would characterize sentiment as mixed," Anderson wrote in his research. "The deceleration in U.S. revenue growth, decline in paid-click growth and macroeconomic concerns hold back enthusiasm for the stock."

Growth Leveling

Indeed, revenue growth for Google has been on the steady decline, falling to 45.7% in the first quarter compared to a year ago, from 51.9% in the fourth quarter vs. a year ago. In the third quarter, revenue growth was up 61.5% from a year ago.

Likewise, Google's paid-click growth had been slipping, to 20% in the first quarter, from 30% in the fourth quarter and 45% in the third quarter.

Mark Mahaney, an analyst for Citigroup, expects paid-click growth for the second quarter to slip again, to 16%. But some of that may be offset by accelerating cost-per-click growth, he added.

Mahaney further noted that Google's international revenue as a percentage of total revenue was 51% in March and 48% in December, up about 400 basis points year over year for both the first and fourth quarters.

"As with other leading Internet companies like eBay ( EBAY) and Amazon ( AMZN), we believe this significant international exposure has been and can continue to be a substantial driver of top-line growth," Mahaney said. "In the Internet advertising market, we view international growth rates at as much as twice those of U.S. levels."

Douglas Anmuth, of Lehman Brothers, expects Google's paid-click and revenue growth to stabilize in the second quarter, maintaining that company is operating from a position of strength due in part to robust traffic, improvements on monetizing search and more disciplined expense controls.

Bidding on Brand Names

Among some of its search monetization improvements, Anmuth noted Google's revised trademark policy in the U.K., which now allows any advertiser to bid on brand-name search terms. Previously only the brand name owners could bid on the terms.

According to anecdotal evidence, Anmuth said, the change has already led to a spike in cost per click, or the amount of money that advertisers pay for clicks on its ads.

"Over time we would expect the spike in trademarked CPCs to normalize, but this change couple with continued search share gains and great overall adoption of search advertising in the U.K. could enable Google to shrug off macro factors and potentially even re-accelerate U.K. revenue growth," Anmuth said.

Google has also expanded its beta version of automatic matching to a small group of users. The system helps extend the reach of an advertising campaign by automatically buying additional keywords that Google believes could help the advertiser.

"While we believe the incremental contribution in the second quarter from Auto Matching will still be small, we view this initiative positively over time," Anmuth wrote.

Also in the second quarter, Google will see a full quarter of revenue contribution from DoubleClick, for which it paid $3.2 billion.

"With the acquisition of DoubleClick, entry into the display market is the most tangible opportunity in the near-term," Anderson wrote in his research. "The display ad market is a very significant opportunity but how GOOG will drive revenue synergies remains to be seen."

According to the Interactive Advertising Bureau, display advertising is forecast to grow to over $18 billion in 2010 from $12 billion in 2007.

For the second quarter, Anderson predicts $65 million in revenue for DoubleClick and $102 million in cash expenses, for a net loss of $37 million.

Reporting July 22 is Google rival Yahoo! ( YHOO), shares of which have dropped recently on renewed talk of a merger with software powerhouse Microsoft ( MSFT).

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