FT : Google – Beyond The Hype
Friday, July 17, 2009
Google is a world-conquering, book-scanning, Microsoft-baiting, YouTube- funding phenomenon. But at its heart lies a simple business. The bulk of its revenues come from putting adverts alongside search results. So when Google reports second-quarter numbers after the US close on Thursday, there are two numbers most investors should pay attention to – growth in paid clicks, and the operating margin. The overall level of sales growth is still important because Google shares are priced as a company only in the early stages of development. The group trades on 24 times prospective earnings, even though quarter-on-quarter sales declined earlier this year for the first time. The consensus forecast is for $4.1bn in net revenue, or a pedestrian 4% growth. However, there are two factors at play in that rate of expansion – how often people click on Google’s adverts, and what advertisers are paying for them.
Bernstein Research notes that paid click growth has remained strong throughout the downturn, not dipping below 17% annually, while revenue per click has fallen as advertisers cut spending. If that growth in paid clicks remains high, then Google’s sales growth should pick up if the economy recovers. The operating margin, meanwhile, has been drifting down – from 34% in 2005 (as a proportion of gross revenues) to 30% last year as Google invested heavily. But the company has since cut costs, axing both staff and pet projects. Matching the first-quarter margin of 34% would be a reminder of Google’s ability to manage earnings growth. All of which is impressive, but for such a highly rated company should also be well known. To ultimately move higher, Google must deliver the unexpected.