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Google’s Mortalization

Posted on Friday, Feb 1st 2008

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%.

Google's chart

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!

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Greenlight Wireless Blog » Google Bullish On Mobile Advertising…Really? Friday, February 1, 2008 at 11:25 AM PT

You’re rooting for the underdogs. Google has become the 800lb gorilla in online advertising. They are the beneficiaries of the network effect; similar to Microsoft in Windows and Office, and Apple in iPods/digital music and possibly digital media.

Google’s strength is a large part of Yahoo’s continued weakening. I don’t think that Microsoft will turn Yahoo around, if their acquisition is successful.

Google has been growing revenues and profits. What would bring Google down? They’ve in the pole position for search and online ad revenues.

The stock price is coming down, but it was so high. Its’ multiple over earnings is still so high, with a PE ratio over 40. I wonder at what point it would make sense to get back into GOOG. Google’s growth has been astronomical, and I don’t think there just going to fall apart all of a sudden, even with some inevitable brain drain.

Google has a lot of very smart people over there. With the stock price coming back down to earth, Google may continue to experience an exodus of talented people looking to work for smaller companies, especially start-ups with better opportunities in stock options. I understand that you don’t think ex-Googlers make good entrepreneurs. They’re too pampered. Do you think they could be good employees for small companies further along their growth path, with some critical mass and momentum?

Realtosh Friday, February 1, 2008 at 2:22 PM PT

I don’t. I am not a believer in Google’s management philosophy. They have a great business franchise, and like eBay enjoyed its franchise for a decade despite bad leadership, I think Google will also enjoy their franchise for a while, despite bad management principles. And their employees are growing up with unreal expectations, so no, I don’t think they would make good employees for startups.

In general. There are always exceptions.

Sramana Mitra Friday, February 1, 2008 at 6:05 PM PT

[…] Here’s an excerpt from last week’s analysis on Google’s earnings: […]

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