Google’s Mortalization

Those who make a habit of existing in the clouds eventually have to descend. Perhaps, Google is experiencing a slight doze of “mortalization”.

Google investors have lost more than 18% of their money over the past month due to concerns about the crumbling US macroeconomic condition. After yesterday’s 4Q07 results which were highly overestimated by the Street, there is more pressure on Google’s share price, which fell more than 6.5% in after hours trading. This morning, it dropped a further 10%.

The irony is that Google’s results are spectacular by any standards.

In 4Q07, revenue jumped 51% y-o-y to $4.83 billion. Net income for the period ended in December rose to $1.21 billion or $3.79 per share, up 17% versus $1.03 billion or $3.29 per share a year ago. Traffic Acquisition Cost (TAC) totaled $1.44 billion, or 30% of advertising revenue, compared to 29% in 3Q07. Earnings per share amounted to $4.43, falling below analysts’ estimates of $4.47 per share.

Revenue on Google’s site stood at $3.12 billion, up 58% y-o-y. Google Network sites generated $1.64 billion, or 37% y-o-y (via AdSense). During the quarter, free cash flow was $1.02 billion. Total paid clicks in the quarter rose 30%, compared to the 45% growth rate a year ago.

For the full year, Google earned $4.2 billion or $13.29 per share, as compared to $3.1 billion or $9.94 per share in 2006. Revenue in 2007 totaled $16.6 billion, a 56% increase from $10.6 billion in 2006.

During the previous quarter, the major points of concern for the company were its decreasing ad revenues and increasing TAC. Falling ad revenues from some of the major social networking sites continued to hit it’s bottom-line.

The recent addition of ads on YouTube video clips is going favorably for Google. Last month, YouTube opened up its complete library of clips and television shows to mobile-phone users. Google also started selling ads on Web sites designed for mobile phones. [Unconfirmed, but I have heard from some sources that YouTube is now generating $400 Million in Adsense revenues. If that is true, they have figured out how to recover their acquisition cost.]

There is mounting pressure on Google to pay $900 million at the end of 2010 to News Corp., so it may lead to some more losses if the ad revenue from MySpace is not enough to cover the total payment.

Considering the present weaknesses in travel, financial and retail sectors, there may be some more bad news ahead.

Meanwhile, Microsoft has bid $44.6 billion for Yahoo, attempting to gain a competitive edge in the online media market. If Microsoft ultimately succeeds in buying Yahoo (which by all signs they would), this will mean that Google could FINALLY have some real competition. [Read: Microsoft to Rescue the Yahoo Damsel in Distress.] The deal itself may be inevitable, the but whether they would be able to integrate and turnaround MSN and Yahoo is a big question mark, so I won’t go so far as to say this competitive force is quite ready to take on Google yet.

In summary, perhaps, 2008 is the year of Google’s “mortalization.” Let’s hope it is!