Google Earnings: All About Ads (Update 1)

Updated from 8:30 a.m. EDT to provide additional analysis in the third paragraph.

NEW YORK ( TheStreet) -- Google ( GOOG) is set to report second-quarter earnings Thursday after the close of trading and all eyes will continue to be on cost-per-clicks (CPCs). If that metric rises, it could give Google a boost.

Google generates the vast majority of its revenue via advertising. As more eyeballs are on Android devices, iPhones, tablets and other mobile platforms, the advertising business has gotten harder. There's less room on the screen and people are less likely to click on these ads as a result.

The company is trying to diversify away from being primarily an advertising business, having purchased Motorola last year. Last quarter, Google generated $1.02 billion in hardware revenue, 7% of first-quarter revenue. As excitement around the upcoming Moto X phone increases, that number is likely to increase.

Analysts polled by Thomson Reuters expect Google to report earnings of $10.79 a share on $14.42 billion in revenue, including traffic acquisition costs (TAC). Analysts surveyed by Estimize are looking for profit of $11.05 a share on $11.35 billion in sales, excluding TAC.

The Mountain View, Calif.-based company is trying to change that with its new Enhanced Campaign initiative, which could be a boost for the stock. Credit Suisse analyst Stephen Ju noted he's seeing an upward bias in CPCs ahead of the upgrade in July. Ju rates Google "outperform" with a $1,000 price target, and is optimistic on Google as it continues to adapt to new platforms.

"We remain optimistic on the company's positioning and ability to achieve our mid-teen revenue and growth forecasts, particularly within the context of the disruptive nature of smartphones and tablet adoption (as highlighted in GOOG: High Conviction on Estimates; Higher Conviction on Mobile Future)," Ju wrote in his note.

The Enhanced Campaign initiative officially starts on July 22.

Google's answer to Amazon.com ( AMZN), Product Listing Ads (PLAs), seems to be gaining traction, and advertisers are flocking to them in an exceptional way, said Ju.

"As we have noted before, PLA budgets appear to be largely incremental, and Google should continue to see the benefits in 2H13 from additional retailer adoption following the recent completion of its global rollout," the analyst said.

Brian Pitz at Jefferies, who rates Google "buy" with a $1,000 price target, noted that PLAs are largely a positive for Google, as advertisers are running more ads than ever. "PLA penetration levels in the UK are about 12 mos behind the US, but growth is high - a +ve given GOOG transitioned its Int'l Shopping program to a paid svc in Feb.," Pitz wrote in a note.

It will be interesting to see whether CPCs have started to rise both sequentially and year over year, as advertising is still the lifeblood of Google's business. If there is a sense that ad rates are going higher, investors may be googling "higher stock prices" for some time to come.

-- Written by Chris Ciaccia in New York

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