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Google's Gotta Hustle to Meet Growth Targets

The Street's bullish expectations require it to replicate its U.S. success abroad.

Continuing spectacular growth at Google (GOOG) - Get Alphabet Inc. Class C Report will be tougher than Wall Street thinks.

The consensus among sell-side analysts has the company growing earnings by 34% a year

-- for the next five years. That puts Google's price-to-earnings-to-growth ratio -- a measure of its valuation compared to expected growth -- at 1, making it the lowest for large-cap Internet stocks, including companies such as

Yahoo!

(YHOO)

and

eBay

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.

But such impressive growth won't be easy. Google is now on track to deliver net income of $4.8 billion this year. Growing such sizable earnings that fast would be a challenge for any company.

At the same time, growth in the search ad market, which has accounted for almost all the company's revenue, is slowing -- particularly in the U.S.

That means Google will be increasingly dependent on overseas revenue for growth and will also have to push into new forms of advertising such as display, video and mobile. And while analyst earnings projections imply that the company will be able to replicate its domestic search ad success in those mediums, the results thus far are decidedly mixed.

Rather than bank on analyst forecasts and recommendations, then, investors should keep a close eye on Google's progress in these emerging areas before jumping in.

Wall Street analysts seem to be much less skeptical about the company's prospects. Of the 39 analysts that cover the stock, 35 rate it a buy or a strong buy. And even the lowest $540 price target on the stock implies an upside of about 6%.

Amid the broad market rally on Wednesday, Google closed up 1.3% to $512.88.

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But this week saw more unflinching analyst support for the stock. "Google in 'Must-Buy' Territory'," declared RBC Capial Markets analyst Jordan Rohan, whose central argument -- that Google's 26.3 times forward earnings multiple is one standard deviation below the 31 that it generally commands and that has previously signaled a good entry point -- is worth noting. RBC makes a market in Google shares.

Still, the approach of using Google's historical P/E ratio masks the notion that Google's future will be very different as the company comes to rely more on international revenue -- and as it's forced to tap new streams of revenue.

Indeed, while Google currently gets about half of its revenue internationally, RBC forecasts that international revenue will account for about $2.1 billion more than domestic revenue in 2008.

However, while Google will rely increasingly on international revenue, those numbers will be exceptionally difficult to predict. In the highest-growth markets such as China, for example, Google continues to lag behind newer competitors such as

Baidu.com

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.

Google is in fourth place in China, commanding only 10% of the country's online ad revenue, research firm Analysys International reported last week. Market leader Baidu, meanwhile, commands 23.5% of the market.

Beyond even market share, though, forecasting the growth of the international online ad market can be tough even by itself. Research firms such as eMarketer, while having forecasts for U.S. ad spending, have yet to produce these predictions on a global basis.

All of this puts the onus on Google's push into new ad markets. And in that arena, there is even less certainty about Google's progress -- and an even more heated debate about what will contribute to the company's bottom line and subsequent stock performance.

Take Google's recent launch of ads on its popular YouTube video-sharing service. While some analysts saw the potential for revenue as high as $1.1 billion in the coming year, Rohan takes a steeply different approach.

"YouTube may be a valuable asset strategically, but its financial justification has not yet materialized," he wrote, estimating that the new ads would contribute only $4 million in net revenue per

quarter

initially. "The inherent business challenge for YouTube is that advertising revenue on many of the popular clips would require a significant license fee paid to the owner of the content."

Of course, it's too early to tell what new ads on YouTube will deliver. But that just illustrates how difficult it is to put a number on what a dynamic company such as Google will be earning five years from now.