Google's third quarter: Expectations are high

Google's third quarter is expected to be strong and analysts are already busy raising targets for the fourth quarter.

The search giant reports earnings Thursday and Wall Street is expecting earnings of $5.42 a share on revenue of $4.24 billion, according to Thomson Reuters. However, most analysts are expecting Google to top those estimates. The larger question is the fourth quarter: Analysts are betting that an economic rebound is going to benefit Google more than others.

A lot of folks sound like Goldman Sachs analyst James Mitchell:

We raise 3Q2009-FY2011 net revenue and EPS forecasts by 2%-4% to account for better search industry trends and increased advertiser spending on Google. We view CEO Eric Schmidt’s recent public comments on revenue stabilization as positive for 3Q/4Q revenue.

Here's why there are high hopes for Google's quarter:

Microsoft's Bing search engine is beating up on Yahoo not Google. Google's market share, per comScore, is back at pre-Bing levels (65 percent). Bing appears to be taking Yahoo's search share not Google's.

A weak dollar will help Google. A little more than half of Google's revenue comes from abroad and when those sales convert to dollars the search giant benefits.

Paid search is on the mend and retail is bouncing back. Deutsche Bank analyst Jeetil Patel writes in a research note:

Our recent checks with advertisers and agencies suggest that online advertising and paid search spending has been improving in September, as advertisers look to spend budgets before year-end. Since retailers held back budgets between Feb. and Aug., we think many within this industry vertical are looking to spend during the seasonally busier Fall/holiday seasons with an eye toward ROI. Coupled with advertisers pulling out of Yahoo!’s paid search system, Google appears to be the leading beneficiary of the year-end budget flush.

Google is managing its expenses well. Analysts like J.P. Morgan's Imran Khan expect pro forma operating margins to be 53.3 percent. Khan bets that Google has watched expenses closely this quarter. However, recent outages may point to additional capital expenditures to improve reliability.