Google's Q3 Earnings: 'Tougher Comps Vs. Modest Expectations'

With an expected slowdown in ad spend growth by clients, there is concern regarding the possible decline in Alphabet Inc’s GOOGL core Search revenue growth in Q3, SunTrust Robinson Humphrey’s Robert S. Peck said in a report. He maintained a Buy rating on the company, with a price target of $900.

“In 3Q'16, Google partially laps the third ad link on Mobile, which has been a key driver of elevated growth since 3Q'15,” analyst Peck mentioned. He added that although Google had launched a number of new features, like the fourth link or expanded text ads, focus would be on the potential slowdown in Q3.

Key Investor Concern

Google recorded an acceleration in Sites revenue growth by ~800bps from Q2 to Q4 of 2015. This was mainly driven by improvement in Mobile monetization. Peck stated, however, that recent statements by industry participants had suggested a sequential slowdown in ad spend growth by their clients in Q3 of 2016 to 15-20 percent. He projected Google Sites ad revenue growth of ~19.5 percent y/y, implying a sequential slowdown of ~450 bps, in-line with consensus expectations.

The revenue and EBITDA estimates for Q3 has been reduced from $18.1 billion to $17.9 billion and from $9 billion to $8.9 billion, respectively. The EPS estimate has been raised from $8.40 to $8.55.

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