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Google's Goals Span Globe

Jonathan Berr

Google's (GOOG Quote) global ambitions are only growing bigger.

People using Google Earth, the search-engine giant's satellite map feature, can jump from the company's headquarters in Mountain View, Calif., across the U.S. and Atlantic Ocean to Europe just by moving a mouse. Now, bulls are betting that the company's closely watched overseas expansion will almost be as easy.

Google got 39% of its $1.58 billion in third-quarter revenue from outside the U.S. And although the company is growing fast everywhere, fans of the search engine giant are wagering that international growth in particular is just about to accelerate.

Shares of Google have more than doubled in the past year as advertisers poured money into search-engine marketing. Forrester Research estimates that U.S. search-engine marketing spending will hit $11.7 billion by 2010, a gain of 170% from 2004. During that same period, spending in Europe will jump 250%, to $3.6 billion or so.

"Their international business is lagging the U.S. in terms of the cycle of its development," says Brian Summers, a portfolio manager at Thornburg Investment Management, which has been adding to its Google position. "Europe is a geography that's going to grow faster than the U.S. They actually have a much higher market share in search there than in the U.S."

To meet the growing demand in Europe, Google has added offices in London, Paris, Dublin and Hamburg and continues to hire more staff there, including 600 in the Irish capital. Rival Yahoo! (YHOO Quote) also is pushing into Europe through new offerings such as PC-to-PC calling.

The popularity of search in the U.S. is showing no signs of ebbing as companies shift their advertising spending away from more traditional media such as newspapers and television.

That trend is certainly reflected in Google's share price, which has more than doubled this year. For now, Google is defying skeptics who argue that the company's growth rates are not sustainable and that it's too dependent on the advertising market. Indeed, the company's moves outside of search also have yielded mixed results. Some advertisers also have criticized Google for rushing the release of a beta version of its Google Base listings service.

"What we have maintained since we have held the stock is that Wall Street has been underestimating their earnings power," says Thornburg's Summers. "I think with a company like this that's growing, basically carving out a competitive footprint, you can put a 40 multiple on '07," he says, referring to Wall Street's favored price-to-earnings-estimates formula.

Though Google is not without fault, bulls argue that there are too many things going the company's way that can't be ignored. For example, even companies that don't sell products on the Internet are finding it valuable to advertise in search engines, says Michael Hayes, a vice president of Interpublic Group's (IPG Quote) Initiative Interactive, which provides Internet ad-buying and planning services.

"If you can place the ads where people are ready to buy, you are going to probably get better results," he says. "Being top of mind is very critical."

Advertisers also are getting smarter about how they buy search, and are finding that they don't necessarily have to pay top dollar to be listed first. They also are finding other ways to get their message across online, through methods such as Internet video.

That's still good news for Google, which in competition with rival Microsoft (MSFT Quote) is vying to partner with Time Warner's (TWX Quote) America Online unit. AOL is seen by advertisers as having the best selection of video online, a technology that is expected to gain in popularity. The companies are also improving their video search capabilities.

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