Google's profit rises, but misses mark

January 31, 2008 8:11:24 PM PST
It was a solid day on Wall Street Thursday with stocks up 200 points. However, a closing bell earnings report has sent Google into an after-hours tailspin.

Google's performance Thursday raises new questions about the effects of a downturn in Silicon Valley. Google reported earnings of $1.2 billion dollars -- a 17-percent increase. However, that was less than most analysts' estimates. Google stock began to tank, falling $38 a share -- almost seven percent -- in after-hours trading.

The saying, "no good deed goes unpunished," may apply here. Overall, Google is what other companies would like to be. It's dominant with more than half of all search traffic, dwarfing second-place Yahoo. It's innovative, creating new ways to search and use the Internet. And, it's profitable. But that's not always good enough for Wall Street.

"Looking at 2007, we're very, very pleased with our year and also with the quarter that just ended," says Eric Schmidt, Google Chairman and CEO.

Google indeed was having a good day. The stock price closed up almost three-percent. Then investors hammered the stock after the earnings announcement.

"The company fell short of what Wall Street analysts wanted to hear in terms of revenue and profit. But the company itself doesn't offer any guidance on its own, so as far as it was concerned, the quarter was just fine," says John Letzing with MarketWatch.com.

Despite higher profits, Google seems to be suffering from Wall Street's worries about the sluggish economy. Google relies on sponsored advertising to underwrite its free search services, but advertising revenue can be hurt by an economic slump as companies reduce their budgets. Advertisers on Google pay when people click on their link.

Analyst Sandeep Aggarwal at the San Francisco office of Oppenheimer points out investors may also be worried about a big investment Google wants to make in wireless spectrum, perhaps to usher in the next-biggest thing since the iPhone.

"The minimum commitment is $4.6 billion. Oftentimes, investors do not like when a company makes that level of commitment in a non-core business area," says Aggarwal.

Google may weather a U.S. recession by virtue of its growing focus overseas. Almost half of its queries originate internationally. Its search engine is now available in 15 languages.

"So even if you see a slowdown in the U.S., they are still very highly exposed on international locations which are seeing much higher growth rate," says Aggarwal.

Google also thinks that, even in a recession, consumers may find its search capability more valuable than ever.

"We think overall people are doing more comparison shopping and looking for bargains. That's probably positive. Search-based efforts will fare pretty well," says Jonathan Rosenberg, senior vice president of product management and marketing.

Google is one of those few stocks trading in the stratosphere. That gives it visibility, but it also exposes it to higher expectations.


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