A week after Yahoo! reported strong third-quarter numbers, shares in Google have continued their skyward trajectory -- thanks in part to Yahoo!'s comments about the state of the paid-search business.
Now the question is whether Google's stock price -- up 5% over the past week, while Yahoo! has been flat -- can find support from whatever Google's tight-lipped management will say in reporting third-quarter results late Thursday.
"You head into Google's report knowing Yahoo! had a good quarter," says Schwab SoundView analyst Jordan Rohan. "I think it's likely Google will show very strong international growth and a respectable performance domestically." Rohan has an outperform rating on Google and a Street-high $180 price target.
On Wednesday, Google's shares were trading at $144.29 -- down $3.65 for the day, but up 70% from the $85 offering price at which the search engine operator's stock went public two months ago.
Google, which will be reporting its quarterly results as a public company for the first time, poses a challenge for forecasters. While the company has supplied relatively detailed information about its sales and costs, its executives have indicated they don't plan to supply estimates to investors; their willingness to chat about current business trends remains to be seen.
The stock's fortunes have been boosted by a relatively small amount of freely tradeable shares, along with news that mutual fund players Fidelity and Legg Mason have taken major stakes. Google's climb has not only inspired less-than-positive ratings on the stock, but also led analysts to reconsider those outlooks.
On Tuesday, for example, American Technology Research's Mark Mahaney -- who downgraded Google from a hold to a sell on valuation issues earlier this month -- reiterated his sell rating on Google, though he qualified it somewhat: "As we wrote in our YHOO earnings review," noted Mahaney, "those results gave us, at the margin, less conviction in this call."
Earlier this month, Laura Martin of Soleil/Media Metrics raised her estimates and rating for Google to hold, a little over a month after initiating coverage on the stock with a sell.
As for the tea leaves that Yahoo! left for Google analysts to read, Yahoo! said that net marketing revenue in the third quarter grew 38% on an organic basis from the corresponding quarter one year earlier, beating second-quarter organic growth of 35%. Most of that growth is believed to come from paid-search advertising, as opposed to traditional, branded display advertising. The volume in the search business was greater than expected, Yahoo! indicated. "Search was the highlight of the quarter, driven by both pricing expansion and volume growth," noted Youssef Squali of Jefferies.
Now the question is to what degree the performance of Yahoo!'s search business in the third quarter will predict Google's results -- a calculation that's complicated by Yahoo!'s not breaking out detailed information about its search revenue. Mahaney calculates that search revenue at Yahoo! grew 12% from the second quarter to the third, with most of that growth coming from international properties. Rohan, meanwhile, estimates that revenue from Yahoo!'s search partners, excluding
, grew 6%.
For the record, analysts surveyed by Thomson First Call are expecting revenue of $454 million for the quarter, a figure that excludes traffic acquisition cost, or the money that Google pays other publishers to run its advertising on their Web sites. (The revenue figure also includes a small amount of licensing revenue, sales whose growth rate lags that of advertising.)
The consensus number represents 7% growth from the $423 million in revenue ex-TAC that Google reported for the second quarter. Rohan says he expects 9% sequential revenue growth, or $462 million in net revenue; Mahaney, forecasting search revenue growth of 13% -- offset by a $5.5 million drop in licensing fees -- is forecasting $467 million in revenue.
Among investors' concerns is "a worry the company's management will say something unfriendly to investors," says Rohan. "If the growth in net revenues is 9% sequentially or higher, the company doesn't have to say much. It means the platform is growing in a very robust manner."
The median First Call forecast for earnings before interest, taxes, depreciation and amortization is $287 million for the quarter, while the mean earnings-per-share forecast is 54 cents.
With the 2005 EPS consensus at $2.80, Google is trading at about 53 times estimated earnings -- a P/E ratio that Google's supporters would say is supported by the company's growth. Expected full-year 2004 revenue of $1.79 billion implies 90% growth from 2003, and the 2005 consensus of $2.67 billion implies 50% revenue growth.
Whether Google will live up to those expectations, of course, depends on several factors, notably including other players in the search business.
On Tuesday, Google announced a multiyear deal with
AOL Europe, as part of which the America Online unit will run Google's search-engine advertising on its service, in addition to the nonpaid search engine results that AOL Europe already obtains from Google. Yahoo!'s Overture Services had previously been the paid search supplier for AOL Europe.
While replacing Overture would appear to signal growth at Yahoo!'s expense, Yahoo! sought to indicated otherwise. "Overture engages in distribution partnerships that make strategic and financial sense for our business," Yahoo! said in a statement Tuesday. "In the case of AOL Europe, these criteria could not be met."
Highlighting competition on another front, Google earlier this month released Google Search, a product that lets Windows users search not only the Internet, but also the material stored on their own computer, including material in Microsoft Word, Excel and PowerPoint files.
With Microsoft working to develop its own search business to make an incursion on Google's turf, it appears that Google is attempting to make inroads on Microsoft's desktop dominance.