GOOG revenue expectations for Q4

In a previous post, I explored Google’s earnings and found that the analysts consensus is a high target. With Google entering the strongest quarter of the year, is their top line or revenue an easy target. In this post, I will explore this.

The consensus for Google’s revenue number is currently running at $2180 million TAC adjusted. Last quarter GOOG produced $1860 billion. That is 17.2% quarter over quarter revenue increase. This would mean that they would earn $3153M gross revenue (revenue not adjusted for TAC).

Last year GOOG had a 21.6% quarter over quarter increase so 17.2% should be a walk in the park…………….. right? After all this is Google’s best quarter.

Actually $2180 million is a very high target. As a careful investor, I would not think that it is a given.

Why is this number not just another number for Google to blow away? From my previous post, following is Google’s revenue starting from when it went public:

GOOG gross revenue with quarter over quarter growth
(04) 3) $806M 4) $1032M (28%)
(05) 1) $1257M (21.8%) 2) $1384M (10.1%) 3) $1578M (14.2%) 4) $1919M (21.6%)
(06) 1) $2254M (17.5%) 2) $2456M (9%) 3) $2690M (9.5%)

Growth metrics
Q3(06)/Q3(05)=1.70
Q2(06)/Q2(05)=1.77
Q1(06)/Q1(05)=1.79
Q4(05)/Q4(04)=1.86
Q3(05)/Q3(04)=1.96


As you can see, the numbers on a percentage basis are decreasing. This is very clear. As Google grows, the numbers on a percentage basis become much harder to achieve. To demonstrate this I will show the dollar amount that would need to produce the growth:

Q4(05) growth over Q3(05); $341 million.
At $3153 million gross, Q4(06) over Q3(06) would be $463 million. That is $122 million more growth than produced in Q4 last year. This is where the large number statement for Google becomes prevalent.

Now I’m not going to predict that Google misses this target. Many things could happen that would make this number higher like addition sources of revenue. Even with products like Youtube ™ and Google Checkout ™, most of Google’s income will be derived from search. Most of Google’s new sources of revenue haven’t been efficiently monetized yet.

With 10 straight quarters of growth in search revenue, what happens if growth slows?

The gross revenue number of $3153 million could be considerbly less.

Now, I am not predicting a miss in revenue for Q4 but am pointing out the risk which is real. There are many people like Jim Cramer who are not even mentioning the risk that is associated with investing in growth stocks like GOOG. Anybody who has perused the message boards and online discussion groups regarding Google will see people predicting insane near term numbers like $1000 and $1500. A new breed of idiots has been born. There may be some people who lose a considerable amount of money due to these recomendation’s by perma-pumpers.

Folks……..Google is a risky investment. Due to the risk, an investor may receive a nice return. These returns are not a guarantee, though, and could be subject to large losses.

The last post in this series will look at costs and taxes. It will become evident that GOOG will most likely have to meat the revenue number to meat EPS consensus for Q4(06). Even if the revenue number is hit, there is a possibility for an EPS miss. Everyone should be risk adverse and it would be a mistake to take on a new investment either long or short through Google’s earnings.


GL investors


Disclosure: I am not currently long or short GOOG.

Note to all readers: This post and all other posts in this blog are for entertainment purposes only. All of the stocks described are very highly speculative. Investing in the stocks mentioned could produce severe losses if you were to invest in these stocks. None of these stocks represent a recommendation in any way. As an individual investor, you have to assume your own risk. Prior performance is no guarantee of future returns.