Google: Both Sides Now

If they handed out awards to stocks like they do for movies, there's no question who would win the grand prize for 2005: Google(GOOG Quote). Not only was it up 115% last year -- capping a 127% post-IPO jump in 2004 -- it drew the largest amount of discussion, examination, speculation and obsession.

So, as we tear the final sheets from our desk calendars, it's time to become absorbed in new questions: Whither Google in 2006? Will the stock pull off the proverbial hat trick? Or is the highest of Internet highfliers headed for a fall?

You don't have to go far to hear arguments in favor of both scenarios. In fact, if you're like most Google junkies, you probably find yourself on both sides of the debate, depending on the day.

One day, Google is secretly plotting to take over the entire Internet; the next it's destined to be undone by that very hubris. Today, Internet advertising is booming; tomorrow there will be hand-wringing about Google's inability to make money beyond search.

To sort out this analytical tug of war, here are two good reasons why Google will rise in 2006, two why it will fall, and the likely outcome for the stock in the coming year.

Bullish Case No. 1: Search Stays Huge

Will Google ever find a revenue stream beyond search ads, as Yahoo!(YHOO Quote) has? The answer is it won't really matter in 2006. The market for online ads is forecast to grow 32% to $16.6 billion, according to Credit Suisse First Boston. And there's every reason to believe that search-driven ads, which are more easily targeted to readers' interests, will draw in more than traditional banner ads.

More importantly, Google will remain primarily a search company for the next few years, if not for good, by design. The first number in the company's 70-20-10 rule requires all employees to spend 70% of time on Google's core business, which is search advertising. Listen to Google execs and it's clear that they aren't anywhere near where they want to be in search technology.