When Google announces its third quarter earnings on Thursday it faces two large questions. First, Google can provide insight to the broader economy based on what industries are advertising. And the second item revolves around integrating Motorola Mobility, the hit on profit margins and distractions.
Those two issues overshadow pretty much anything else Google CEO Larry Page and the gang will have to say. The Motorola Mobility acquisition won't be completed for a few more months, but Piper Jaffray analyst Gene Munster expects operating margins for 2012 to fall from 46 percent to the low 30 percent range.
Welcome to the hardware business Google.
Previous quarters for Google have revolved around investment in data centers and people, mobile and the health of search. This time around the quarterly topics will be a bit different. Munster said:
We believe the Street focus has shifted to answering the question of "What happens to Google if there is a recession?" If the economy again slows, as we saw in 2008, Google is not immune and it is likely Street estimates would need to be reduced. Finally, we believe investors are also looking at what the Motorola Mobility acquisition will do to margins.
Wall Street is expecting Google to report earnings of $8.74 a share on revenue of $7.21 billion.
Analysts expect Google to have gained in the third quarter due to back-to-school shopping and mobile gains. Other analysts aren't as skittish about Google's ability to navigate the economy.
Anthony J. DiClemente, an analyst at Barclays Capital, said:
While macro drivers may have impacted overall advertising growth, particularly given Google’s European exposure, we remind investors that search has historically been among the last of the ad formats to be impacted from a slowdown and among the first to improve.
Overall, however, analysts are worried that Google is losing focus and ad dollars to Facebook in a slowing economy. Stifel Nicolaus analyst Jordan Rohan said:
With 30%+ of aggregate Internet minutes spent on Facebook, the Internet's center of gravity is shifting from Google to Facebook. This is translating to a CMO-level push to keep growth in search budgets low in 2012, while shifting spend to social and display. Macro concerns help to reinforce that cautious view. Android's emergence continues to be remarkable, but the monetization of mobile click inventory for Google remains challenging. Large acquisitions like Motorola Mobility may become more frequent and could distract Google's senior management team.
Overall, analysts appear to be losing their Google goggles.
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