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Salesforce Industries Summit

Google Lumbers In With Modest Q1 Growth

By Erika Morphy
Apr 17, 2009 12:19 PM PT

It's telling when a company in this market registers growth yet still comes under scrutiny because the growth wasn't as high as previous years. Then again, this is Google we're talking about -- the uber-corporation of the Web with seemingly limitless potential and promise.

Google Lumbers In With Modest Q1 Growth

It still has both, of course. However, due to both a combination of the economy and, more fundamentally, its immense size and scale, its growth rate no longer wows the market.

Q1 net income for Google rose by 8.9 percent to US$1.42 billion, or $4.49 a share, the company reported. A year ago, net income was $1.31 billion, or $4.12 a share. Revenue for Q1 was $5.51 billion, a 6 percent increase from the same period last year -- but a 3 percent drop from Q4 2008. This is its first sequential decline in revenue. Still, the drop was in line with analysts' expectations.

Stock Rally

Not surprisingly, Google's stock rallied by $20 per share after the report was released, Frederic Ruffy, Options Strategist for WhatsTrading.com, told the E-Commerce Times.

However, the post-earnings rally proved short-lived after investors took a closer look at the report, he said. It turned out that "most of the earnings improvement was due to cost management. In addition, the company issued cautious commentary about the second and third quarters."

Wall Street's reaction then followed its typical roller coaster path: The stock's gains were subsequently erased and trading lower in pre-market Friday morning activity. After hitting a low of $384.81, it then battled back and made a run toward $400, Ruffy recounted. By mid-day Friday, the stock was up $5.51 to $394.25. "The rebound in shares seems to reflect expectations that overall earnings outlook is improving after the recent slump," he said.

Broader Trend

Indeed, Google's earnings will likely lend credence to the growing hope that the worst is over for the tech space. Looking toward Google as a harbinger of a tech recovery is a mistake, Ruffy also said. The earnings reporting season is just getting underway. "Intel released results earlier in the week, and shares slumped after the company failed to provide clear guidance for the months ahead," he said. Meanwhile, IBM and Texas Instruments report Monday and Yahoo Tuesday.

Overall, analysts have high expectations for the tech sector -- that is, technology companies within the S&P 500 -- and expect year-over-year earnings growth of 46 percent in the first quarter, 36 percent in the second, and 37 percent in the third, Ruffy said.

"The danger is, expectations have risen too much, and companies will begin scaling back estimates for future quarters or, like Intel, fail to provide any guidance at all."

Recession? Or Too Big?

Google has often been more of an outlier than typical for the industry. The slowdown in profits and growth is clearly due in part to the economy: With the severe recession, online advertising is dropping as fewer customers spend money.

It is also due, though, to the fact that the company's momentum was inevitably going to slow, Scott Testa, a professor of marketing at St. Joseph's University, told the E-Commerce Times.

"From an economies of scale point of view, a company can only grow so fast. Two years ago, if you had said Google would lay off staff, no one would have believed it, its growth was so fast."

Even in a reasonable economy, Testa speculated, Google may no longer be able to produce blow-out numbers.

Still, never say never about Google. The company is still investing heavily in the areas it feels will deliver future growth, Greg Sterling, principal of Sterling Marketing Intelligence, told the E-Commerce Times. "Display advertising, mobile applications and, to a lesser degree, the enterprise business applications -- are all areas in which it is putting money," he said.


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