Rob Sanderson at AmTech thinks Google will miss consensus when it reports Q3 results tomorrow after the close. We’re still working on our own preview (and a Google Earnings Game!), but, for now, here’s Rob’s preview to chew on:
Probably Not as Bad as Feared, but Estimates Coming Down. GOOG will report Q3 results tomorrow, after the market close, with a conference call at 4:30 PM ET. Results are likely to fall modestly short of $4.79 consensus EPS. While we expect a slight shortfall, we anticipate the report will be better than feared. The paid search model is proving to be very resilient in the face of macroeconomic headwinds, but does remain susceptible to the slow-down in overall ad spending.
The stronger U.S. Dollar will cost GOOG roughly $110 million in 3Q08 revenue, $260m in 4Q08 revenue and $1. 3B in 2009 revenue (assuming that FX rates remain stable between now and then). We do not believe consensus fully reflects currency fluctuations. GOOG put on significant EUR and CAD hedges around mid-year, a very timely decision. Gains from these hedges have been substantial to date (we estimate $284m during Q3 and $135m Q4 to date). These are amortized over the 18 months of the forward contract, but only provide a partial offset.
We are encouraged by curtailment of employee-related expenses, but think Street EPS estimates have to come down. We are not making a trading call ahead of the print, but investors with longer-term horizons should be buying at current levels. Reiterate BUY and $480 target.
We agree that Street estimates have to come down, by the way. Wall Street analysts are still looking for 20% revenue growth next year. We have heard that Google’s internal target is 15%, and the latter seems more reasonable. (And Google certainly doesn’t seem poised to blow away the 20% growth estimates in any case).
We also agree with Rob’s long-term buy assessment. But as one of our favourite strategists likes to say (Richard Bernstein at Merrill Lynch), the market doesn’t look over the valley of plummeting fundamentals to the recovery on the other side. So long-term probably means long-term. And we may yet get a better buying opportunity.