Google Earnings Preview: 2009 Estimates Still Too High (GOOG)

Google (GOOG) reports Q4 earnings after the close.  Please join us for LIVE COVERAGE of the results and conference call starting at about 4:15PM ET. (Click here for live coverage. Click here for our chat room.)

Our Bottom Line: Q4 probably OK, but 2009 estimates are still too high (11% growth seems unlikely in this environment). This makes sustainable outperformance by the stock unlikely.

Background: At $300, Google’s stock is trading at about 15X trailing free cash flow of $5 billion (Enterprise Value/FCF).  That is a reasonable multiple, and it reflects a consensus that Google will see only modest growth in 2009.  The stock’s valuation does not, however, reflect the real possibility that Google’s revenue might end up FLAT in 2009 (or worse).  If Google’s trajectory in Q4 makes it clear that 2009 estimates are still too high, which we expect they are, the stock will likely go lower from here.

Key Stats:

  • Net Revenue (Gross – TAC): $4.12 billion
  • Pro-forma Operating Income: $2.04 Billion
  • Adjusted EPS: $4.96

Here’s Citi analyst Mark Mahaney’s excellent preview and cheat sheet:

In Addition To P&L Results, Key Areas To Focus On — GOOG will clearly
provide a read for Internet advertising stocks, and qualitative comments on the
’09 outlook will be key. Specific issues include: 1) Insight into how various
verticals and geographies have trended over the past quarter; 2) Paid click and
CPC growth and the impact from internal quality initiatives vs. the macro
environment; 2) International traction and the extent of adverse impacts from
the slowing European and Asian economies; 3) Cost cutting measures within
the company and its ability to maintain/grow margins; and 4) An update on
display advertising opportunities and YouTube traction.

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