Google's 1Q12 results as a barometer for Facebook's IPO

Google is set to report earnings this Thursday, April 12. Consensus sees net revenues of $8.125 billion and Non-GAAP EPS of $9.62. Investors will use this report, the first before Facebook’s IPO, to gauge the strength of the online advertising market, both display and search, and comments on the MMI acquisition, particularly how management plans to integrate this acquisition.

Most investors expect in-line results and expect the stock to stay flat post earnings. The impact of the difficult to predict FX hedges could impact the reported headline revenue number. On the cost side, investors are modeling cash operating expense growth of 26-28% y/y, which is down sharply from 35% y/y, in 4Q11, and 49% y/y in full year 2011. Hiring growth slowed in 4Q11 but investors expect another solid year of headcount additions for Google, putting pressure on opex growth for the balance of the year. Bonus accruals could be an issue in this quarter. 

On the metrics, investors are modeling paid click growth of 20-22% y/y for the quarter, down from 34% y/y in 4Q11. O&O Search is expected to grow 23-24% y/y with Network growth of 11-13% y/y. The SEM checks were mixed in the quarter, with Ignition One reporting 30% y/y growth in search activity in the U.S., with European spending up 10% y/y.

Efficient Frontier reported search spending of 14% y/y. Investors view both datasets as largely unreliable consistent indicators of Goolgle’s revenue growth results. Concepts likely to be discussed on the call (in response to questions) include:

1. Impact of the Facebook IPO
2. MMI acquisition integration
3. Headcount growth
4. Monetization runway and enhancements over the past few months
5. Panda Updates
6. Capex run rate
7. MMI 
8. Impact of mobile growth

Google trades at 15.3x 2012 Non-GAAP EPS and 8.5x 2012 EV/EBITDA, both reasonable multiples relative to growth prospects. Hence, most investors view the stock as undervalued given its growth and leadership position in the space. 

The stock is down 5% from highs in the beginning of the year but up 9% over the past year. Investors see the stock drifting down with any movement down in the macro environment. Advertising based stocks tend to be more sensitive to macro data. Investors see the stock working if Google is able to post a material beat in 1Q12, which of course goes without saying.

One thing is certain, Google’s report will be scrutinized for the impact to Facebook ahead of the IPO.