It's Good to Be Google

Remember when investors were getting increasingly nervous about 'paid clicks' and the upcoming advertising slowdown? Now, not so much.
By Pia Sarkar ,

SAN FRANCISCO -- It's as if nobody ever doubted

Google

(GOOG) - Get Report

.

Forget about the

company's anxiety-inspiring fourth-quarter results in January

. Or the number of times users had

clicked on ads

during that same month. Or a stock price that had hovered around a 52-week low.

That's all history.

Google shares have been on an upswing ever since the company reported a

strong first quarter last month. And despite dropping 1.7% on Friday to $573.21, the stock has still climbed 28% from where it traded the day before reporting its first-quarter results in April.

Derek Brown, an analyst for Cantor Fitzgerald, says Google was carrying a lot of baggage heading into the first quarter, with investors still worrying that the macro-economy would take its toll.

Data released from research firm comScore, which reported slowing paid clicks for Google in January, certainly didn't help.

"What has been demonstrated since is that that concern was largely overblown," says Brown, whose firm doesn't have a relationship with Google.

Indeed, the Internet giant's rebound has essentially wiped away all that pent-up fear. Brown, who maintains a price target of $750 on Google, notes that the company's fundamentals haven't changed, but investors' perception has.

However, Cowen analyst James Friedland says the redemption granted by shareholders may be premature. The company didn't blow out first-quarter results, and given the fact that the search industry has never really contended with a recession -- or was too young to really be battle-tested -- it's still too early to tell how much Google can withstand.

"To date, Google has not been impacted or if it has, it has not been enough to materially impact its business," says Friedland, whose firm does not have a relationship with Google.

Working in its favor are advertisers who might be trimming their budgets but seem reluctant to cut back on spending for search ads, which is Google's main source of income. Friedland equates it to the same resilience that direct mail experienced during recessions in the past, with advertisers unwilling to give up ads that resulted in increased revenue.

Friedland considers search ads as the "new" direct mail, essentially serving the same purpose by reaching consumers directly, albeit through a different medium.

The X factor is the consumer, who may end up clicking on fewer ads during a recession. But he or she might also decide merely to click on different ads -- not fewer ones -- which would leave Google unscathed.

It's hard to know what is currently happening, and a recession might be over before we know how Google has matched up against it, Friedland says.

Still, the company has a lot going for it. The acquisition of online advertising firm DoubleClick, as well as Google's efforts to monetize on online video site YouTube could help the company in the future, although results may not be seen until a year or more from now.

As for any deals between the Mountain View, Calif.-based company and its rival

Yahoo!

(YHOO)

, which recently ran a two-week test where it outsourced some of its online ads to Google, it's unclear how much either side will benefit.

Many observers view the potential of a longer-term arrangement to help Yahoo! by pumping more revenue back into the company.

Friedland says he doesn't see Google gaining much from a deal, although the threat of one helped derail

Microsoft's

(MSFT) - Get Report

attempt to merge with Yahoo!, which is what Google wanted. Microsoft maintains that any tie-in between Yahoo! and Google would undermine Yahoo!'s own ability to make any headway in the search advertising market.

Friedland says Yahoo! stands to benefit far more than Google if the two end up making a deal, and it could also allow Yahoo! to invest back into its own business and make it stronger against Google.

Goldman Sachs analyst James Mitchell, however, sees a potential upside for Google.

"Using 2009 metrics, we estimate that Google could pick up $300 million in net revenue from Yahoo!'s own searches and $660 million from capturing Yahoo!'s current search affiliates, for a total net revenue enhancement of $960 million," he wrote in his recent research.

Neither Yahoo! nor Google has commented on a possible agreement.

What is ultimately the tough decision now for investors is: where does the stock go from here? Having shed many worries that sunk the stock earlier in the year, does Google make a quick return to its lofty $700 level, as UBS, which raised its price target to that mark on Thursday, suggests?

That's not an easy prediction, following a week where the broader market lost ground for the first time in four weeks, while Google itself seemed to be consolidating after its $75 post-earnings day jump.

What's more, Google's forward 12-month price-to-earnings ratio of 30 and its forward free-cash-flow ratio of 38 are beginning to make some analysts believe valuation is getting stretched, given the recent slowing growth exhibited in the company's U.S. business.

But one thing's for sure: In the past month, anyway, doubting Google hasn't paid off.

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