Great Expectations for Google

July 12, 2006

Google (GOOG) is slated to report earnings in one week. Here’s a look back at the past quarter and what to expect from next Thursday’s report.

Google has been a household verb for quite a while; so popular it was added to the dictionary last week. Google is expected to release its quarterly earnings report after the close of trading on Thursday, July 20th; with Wall Street analysts expecting another banner quarter during a generally slow period for the internet sector. Google has had quite a quarter, releasing a wide array of new services and experiencing some significant accomplishments.

Apart from being added to the dictionary, Google was also added to the S&P 500, a great feat acknowledging it as one of the largest corporations in the United States. Based on market capitalization, it is currently the 24th largest company trading on U.S. financial markets, valued at $126.5 billion.

Google’s new product offerings include e-payment services through Google Checkout, free streaming commercial video, spreadsheet tools, a web calendar, and free wi-fi for the entire city of Mountain View, the location of its headquarters. Google has also announced that it will open a facility in Michigan with 1,000 employees as it continues to expand its operations.

Google’s stock has experienced immense volatility during the past three months, closing down 1% from where it began the quarter. Google started off with a bang, rising over $22 a share on the first day following its previous report. After trading as low as $370, the stock has worked its way back up past the $420 level. In January, extreme optimism propelled it past $475, but it has been downhill since then. Remember Google went public in August of 2004 at $85.

Analysts are currently expecting Google to earn $1.97 a share for the quarter. Due to Google’s policy of not giving any guidance for future earnings, there is no telling what the actual number will be. One analyst has his estimate pegged as high as $2.33, while the lowest is $1.85.

No matter what the actual results, the market reaction is likely to be dramatic. Open interest on out-of-the-money call options is increasing, signaling sophisticated traders positioning themselves for an upward surprise. In addition to good numbers, the report will likely be scoured for clues about the company’s future. If both of these criteria are positive, look for Google shares to shoot up in Thursdays after hours trading, while negativity could lead to a decline. The liquidity in the stock that wasn’t present in its early days of trading signal the percentage loss or gain may be small.

Google executives have admitted that the company’s tremendous growth will eventually slow, so is it worth paying a lofty premium for? Google’s closest competitor, Yahoo (YHOO), is trading at a P/E ratio of 26.5, a significant discount to Google’s 74.7. Investors are anticipating solid growth to continue, but the era of huge earnings increases may be over soon.

Google’s company is expanding and maturing as it diversifies its operations away from obtaining all its revenue from the paid search business. Overexpansion has spelled doom for companies like Microsoft, as investor’s trade in shares of the slow-moving giant for the agile youngster with upbeat prospects.

Analysts have also helped over hype Google. According to Zacks Investment Research, 21 analysts rate Google a Buy, while 2 give it a hold, and no bearish sell ratings. Many even have an accompanying price target of $500-600. Expectations are sky high for Google, and any slip can force these overeager analysts to cut their target prices and downgrade the stock.

Google is a powerful brand and has many exceptional products, but investors should remain wary. New product offerings and solid growth have everyone gaga for Google. Looking ahead, the stock has prospects to run as the company continues to release superior products and earnings. Inevitably, one day, the titan will fall and a new leader will emerge.

At the time of publication, Dhinesh Ganapathiappan did not own or control shares of any companies mentioned in this article.