Investors uneasy as Google costs rise


Reuters | Sat Jul 17, 2010 | 2:53am IST

Google Inc is pumping hundreds of millions of dollars into new businesses, but Wall Street is nervous about the ultimate payoff. Investors sent Google shares down more than 6 percent on Friday, a day after the Internet search leader reported a surge in expenses during the second quarter that caused it to miss profit estimates. The miss was a rare stumble for Google, which has a track record of exceeding expectations. Perhaps more worrisome to some is the sense that Google is losing its position as the pace-setter in the tech industry, just as growth in its Internet search business slows. "There’s clearly uncertainty in these other businesses," said Pat Becker Jr., of Becker Capital Management, which does not own Google shares. Google has moved to position itself in the two key parts of the Internet market: Web-connected smartphones and social networking services. But the company is playing catch-up to Apple Inc and Facebook in each area.

And while Google’s free Android smartphone software has made big gains — Google executives said on Thursday that 160,000 Android phones are activated every day, compared to 65,000 in the first quarter — investors are still not sure how the effort will benefit Google’s bottom line. "I don’t think anybody in the market really understands the economics yet of what that means," said Ironfire Capital’s Eric Jackson, whose fund has a long position in Google. But Jackson said he was confident that mobile would become a significant contributor to Google’s financials in the long run, and that the mobile market was big enough for Google and Apple to prosper. In May Google closed its $750 million deal to buy mobile advertising firm AdMob, one of a string of acquisitions Google has made in recent months.  

While Google did not provide many financial details about its mobile advertising business on Thursday, finance chief Patrick Pichette said the overall rates for mobile search ads are below those of Google’s traditional Internet search ads. Google was also mum on whether its YouTube video site — bought in 2006 for $1.65 billion — has reached profitability, though Pichette said the company was "incredibly pleased by its trajectory." Google’s stock is down more than 25 percent since the start of the year, trading at $461.85 in late trade on Thursday as investors fret about the company’s long-term growth prospects. "People are just not excited by the growth," said UBS analyst Brian Pitz. "Core growth is kind of tapped out so I think they just fear a margin compression story."

Analysts are uncertain about Google’s future in China, the world’s largest Internet market by number of users, following a confrontation with the government over censorship of search results. Google said Chinese authorities recently renewed its license to operate a site in the country for one year. Despite the sell-off, Google’s shares still trade at a premium to some other large-cap tech players. Google’s forward price-earnings multiple is 16.8, said BGC Partner’s Colin Gillis, compared to an 11.1 multiple for Microsoft Corp. Becker Capital’s Becker said that Google’s situation has similarities to Microsoft, another tech giant where the core business has matured and years of investments to develop new revenue streams have yielded only mixed results. "That’s the biggest fear for an investor in large-cap tech growth companies — is that it becomes broken tech, from the standpoint of it stops growing," he said.

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