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Good Night, Google Bears

Kevin Kelleher

Once upon a time, there was a creature known as the Google (GOOG Quote) Bear.

While Google's stock soared past analyst price targets of $200, $300, $400, the Google Bear warned that gravity would soon catch up with the stock. The stock's valuation implied impossible growth, the Google Bear warned, and its continued rise marked the return of a devil-may-care mentality of stock speculation that led to doom in the dot-com bubble.

On Friday, a day after Google delivered yet another quarter of revenue and profit growth that was better than even the more bullish forecasts, the Google Bear is an endangered species. Not in danger of extinction -- no stock can keep growing forever -- but in danger of being irrelevant for a good long while.

So, with Google's stock up nearly 8% to its highest level since January, anyone who shorted the stock going into the company's third-quarter earnings announcement must be busy this morning nursing burnt fingers. Google bulls, meanwhile, are busy raising their price targets on the stock.

Citigroup bumped its $550 target to $600 and Goldman Sachs lifted its $525 target to $595 after Google's third-quarter report, which showed a profit of $2.62 a share (above the consensus of $2.42) and net revenue of $1.87 billion (above the forecast $1.81 billion).

So, just another blowout quarter at Google? Maybe not. This time, it's accompanied by a subtle but significant shift in the way investors are regarding the Internet sector. Suddenly, investing in the Internet has become very simple -- just buy Google.

Implicit in Google's often proclaimed vision of organizing the world's information is the idea that Google isn't simply an Internet company, it's the Internet itself. For years, people have joked about Google becoming an overwhelming powerful company the way they used to joke about Microsoft(MSFT Quote) or, before that, Ma Bell.

But at some point, you have to wonder -- when does the joke become reality?

All along, there was one company that kept in check the idea of Google's global domination, and that was Yahoo! . Google and Yahoo! split the high-calorie, ever-expanding pie of Internet ad revenue, and the horse race between the two companies meant there were at least two options when it came to investing in the Internet.

This week, it became painfully clear just how winded Yahoo! has become in that race. One of the more interesting analyst notes to be released in the wake of Google's earnings report was not on Google, but Yahoo!. Stifel Nicolaus' Scott Devitt lowered his rating on Yahoo! from buy to hold.

"There is one company to recommend in the large-cap Internet media/search sector, Google," Devitt wrote. Stifel Nicolaus has no underwriting relationship with Google or Yahoo!.

Yahoo! recently fell another 2% to $22.70, another new low for the year.

Of course, Google is only going to benefit from its image as the only big Internet company to see unbridled success. Big funds will start to see it as a proxy for the sector, if they don't already. As advertisers continue to shift money from newspapers, magazines and television over to the Internet, they will see Google as the default site, just as most search users do.

There is a new crop of more recent startups that could emerge as a hot growth story, but the most promising of them -- YouTube -- was just bought out by Google. And the others will find it increasingly less tempting to say no to Google should it come knocking.

Google has its challenges, but judging from the earnings call with analysts on Thursday, they are ones that other companies would kill for. One analyst asked CEO Eric Schmidt what it would take for Google to reach a revenue goal of $100 billion. I can't think of another company worried about this.

At another point, founder Sergey Brin sounded a little concerned that the company is too innovative. "If we continue to develop so many new individual products that are all in their assorted silos, you will have to essentially search for our products before you can even use them," he said. "And then you will have to search before you can do a search, in many cases."

Times are good for the Google shareholder. On the conference call, Google founder Larry Page said, "We want to be the easiest company in the world for advertisers to do business with." He might say the same thing about investors.

Which means Google bears will probably be holding their tongues for while. And as long as earnings continue to surprise on the upside, there won't be any objections to Google's refusal to offer earnings guidance.

But it also means Google is, for the first time, not facing any real competition. For a company that has thrived on competition, this could be a bigger concern than having too many products. Yahoo! helped make Google the success it is by driving it to keep improving its offerings and sharpen its edge.

It's hard to keep pushing forward when no one is on your heels. If a lack of competition causes Google to lose its edge, people may start to take the Google bears a little more seriously. But for now, that day seems very far away.