Over-reaction to Google’s Earnings Disappointment

How is Google faring in this ailing US economy? Google’s earnings growth for the second quarter was a disappointment for investors, raising fears that the online search leader has finally stumbled.

Earnings per share were lower than analysts’ forecast. Google reported $4.63, compared to predictions of $4.74, and investors dumped shares causing price to plunge by about 8%. I think this is an over-reaction to a consistently profitable company.

Fundamentals remain strong and their less than sterling performance must be seen in perspective. The acquisition of DoubleClick for $3.2 billion affected their cash position which resulted in 57% less interest earnings from banks. So far, no investment losses in the turbulent financial markets have been incurred.

Google’s dominance in click-based advertising will also tide them through the economic slowdown. Despite keener competition by rivals, Google grabbed a larger search market share. According to Hitwise, Google garnered nearly 70 percent of all U.S. searches, while other leading names like Yahoo and Microsoft lost ground.

It is not surprising to see Google’s CEO Eric Schmidt maintaining an optimistic outlook, even if US economy deteriorates. Revenues continue to flow in from most sectors, except for the flagging real estate. Google can also bank on a bustling international advertising market (accounting for 52 percent) as their next engine of growth.

That is not to say that all is smooth sailing though. There are court cases lining up, one of which is the prominent case initiated by Viacom against YouTube for violation of copyrights. The latest news is that users’ privacy is safe but a potential settlement of $1 billion and a court injunction to stop further infringements may cost Google dearly. Also, the online ad collaboration between Google and Yahoo may not materialize over fears of creating a monopoly.

Nevertheless, given my faith in Google’s management, I believe this panic selling presents an opportune time for long-term investors to accumulate Google’s shares.

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