Last quarter, Google delivered a nice earnings beat with earnings per share (EPS) that was $.31 ahead of Wall Street’s expectations. However, Google’s shares tanked following the earnings release and have still not recovered as investors worry over Google exiting the China market. We are expecting another earnings beat this quarter, and we are hopeful that Google’s stock price will jump on the positive earnings news.

The fourth quarter saw average cost per click (CPC) increase by 5% and we expect to see similar gains in the first quarter. Youtube began showing considerable strength in the fourth quarter and it appears that trend has continued in the first quarter with their homepage inventory completely sold out.

In 2009, Google’s shares more than doubled as gross revenues grew 17%. GOOG’s strong stock performance has not carried over into 2010 though, with the stock declining 8% since the beginning of the year.

The current Wall Street consensus estimates are for revenues of $4.93 billion and EPS of $6.57. We at are forecasting better than expected results, with first quarter revenue of $4.98 billion and $6.74 EPS.

Google is now trading at 18x consensus 2011 EPS estimates. This is below the relative valuations of their peer group. Despite exiting the China market, Google appears to have tremendous growth opportunities over the next few years and we would expect its stock price to return to its pre-recession levels.

Yahoo
CEO Carol Bartz recently appeared on CNBC and emphasized that Yahoo is “marching forward” and that she will prove it. In addition, EVP Hilary Schneider indicated at the Goldman Sachs technology conference that due to quicker-than-expected regulatory approval on the Microsoft (MSFT: 26.03 0.00%) deal, Yahoo now will receive some “unexpected benefits” in the first quarter. These “unexpected” reimbursements when taken along with Carol Bartz’s comments seem to point to strong first quarter results.

AOL
Meanwhile, AOL seems to be struggling in it’s first full quarter as a public company. On their fourth quarter earnings call, AOL provided Q1 guidance for flat year/year domestic advertising revenue. However, in their recent 10-K filing AOL now anticipates a decline in their first quarter domestic ad revenues.

Here is the specific text from the company’s 10-K filing:

…based on current information, we believe domestic display advertising revenues will decline in the first quarter of 2010 as compared to the first quarter of 2009 as a result of our advertising sales organization restructuring which resulted in the reassignment of a majority of our advertising accounts, significantly lower monetization of AOL Properties through our Third Party Network and an approximate $5 million reduction (which represents an approximate 40% year-over-year decline) in advertising revenue related to legacy agreements on certain AOL Properties.

Since the beginning of 2010, AOL shares have been outperforming Yahoo with AOL gaining 5.3% while Yahoo stock slid 7.2%. However, we would expect those performances to reverse over the next few weeks.