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Google (GOOG)
Google Misses Estimates; Stock Hits the Skids
The past two days could have been better for Google. The Mountain View, CA-based internet behemoth announced earnings late on Thursday that fell well below expectations, and saw its shares hit by more than 7% in after hours trading. Then Friday morning came with an announcement by Microsoft (MSFT: Charts, News, Offers) that it might buy Google's chief rival, Yahoo. Executives and investors alike have to be wondering, "what gives?", but it is unlikely that a great answer will pop up soon. Google might be paying for its string of high-profile partnerships and acquisitions more than expected, as well as some adjustments that it made to the way it runs its online advertising. With share prices sliding at the fastest pace in over two years, how does the company plan on turning things around?
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How bad was Google's earnings report? Not bad enough to stock that bomb shelter you bought for that apocalypse which never quite materialized in the 1950s, but bad enough to make investors feel squeamish. The company reported net income of $1.21bn, a 17% rise compared to the $1.03bn for the same period last year. While sales did grow by 52% to $3.39bn, the fact that the company did not beat estimates, which it had done in eleven of the previous thirteen quarters, was enough to start a sell off. Analysts had expected sales of $3.45bn. The news prompted the biggest share price drop in two years.
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Google makes its money from advertising ($16.4bn in ad sales in 2007), so changes to the way the search engine giant displays ads and counts clicks could bring either a boost in profits or a hit to the bottom line. It seems that the most recent change heralds the latter problem. The Google content network, which consists of websites that run Google advertisements, no longer counts a mouse click near an advertisement as a click, which reduces the revenue that Google brings in. Added misery came in December, when bummed out consumers helped create a nearly 4% drop in internet traffic.
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A deal with MySpace, a social networking site owned by News Corp. (NWS: Charts, News, Offers), requires Google to shell out $900m a year for three years for the right to run advertisements. The hefty deal has become somewhat problematic, since no one is quite sure how to monetize traffic to social networking sites. The company's headline-grabbing acquisition of YouTube is following a similar trend, as no one is quite sure how to advertise on online videos.
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The announcement on Friday that Microsoft was offering a $44bn takeover bid for Google's internet search rival Yahoo (YHOO: Charts, News, Offers) has only made things worse. Google has never been overly worried about the clout of Yahoo, which only controls about a quarter of the search engine market. The combination of Microsoft, which controls about 10% of the search market, and Yahoo could spell some trouble. Google controls a little less than 60% of the market. There is also the fear that the creativity and market depth of Microsoft will finally be unleashed, putting added pressure on Google to be innovative and attract customers. It's unlikely that any Microsoft/Yahoo deal will create immediate results, since the online advertising platforms for both sites are far less sophisticated than Google's, but the threat still looms.
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Google's got a rough road ahead. Typically recessions bring about a drop in advertising expenditures - though no one is quite sure if the U.S. economy is actually in a recession, but for internet advertising there are more shades of gray. Investors are certainly disappointed in the 25% drop in share prices since the first of the year, and probably are reminiscing about the $741 peak last November. While Google is far from imploding, it is going to have to step it up and figure out how to increase its international reach as well as monetize traffic to its social networking and online video partners.
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