Google Fans Fear Fat

Doing no evil is turning into a pricey proposition at Google (GOOG).

The Internet search giant is due to post second-quarter earnings after the market closes Thursday. Analysts are expecting the Mountain View, Calif., company to make $2.21 a share, up from $1.36 last year, according to a Thomson Financial survey. Revenue is expected to surge to $1.64 billion from $890 million a year earlier.

Those are obviously gaudy numbers, and Google's rapid growth goes a long way toward explaining the stock's continuing appeal despite its sky-high valuation.

"You can't argue that it's cheap," says Jerry Jordan, whose $25 million Jordan Opportunity Fund holds Google. Instead, Jordan says, Google is "one of the great secular growth stories of which there are very, very few."

Still, any perceived shortfall will surely punish Google's stock, which has been flat in 2006 after more than doubling in each of the last two years. One area of particular concern is how much Google is spending to maintain its much-discussed air of technological superiority.

Though Google provides no earnings guidance or much other data to investors, the company has made clear its plans to boost spending.

"We expect the annual growth rate of our investments in property and equipment for 2006, including information and technology infrastructure and land and buildings, to be substantially greater than our annual revenue growth rate for 2006," Google says in its most recent 10-Q filing with the Securities and Exchange Commission.

Google's capital expenditures more than doubled during the first quarter, and probably rose at nearly the same rate during the second quarter, to $375 million, according to RBC Capital Markets analyst Jordan Rohan, who rates Google stock outperform. His firm makes a market in Google shares.

To view Street Insight's video preview of Google, please click here .

While Wall Street typically takes a dim view of companies whose expenses are rising at a faster rate than their revenue, Google isn't most companies. Google's revenue excluding costs is expected to rise 84% in a quarter during which Internet use is slow because of the summer holidays. That's better than the 30% gain expected for Yahoo! ( YHOO) or the 14% jump expected at Microsoft ( MSFT).

About the only thing that both bulls and bears agree on about Google is that it's too dependent on search and needs to diversify its revenue base. In part, that's what all the spending is about.

"It's key for them to do that," says Mike Binger, who helps manage $1.5 billion for Thrivent Financial, including Google shares. "They are not going to be able to grow at eye-popping rates forever in search."

Google still has plenty of opportunity for growth. Analysts point to regions outside the U.S. and the increasing use of mobile devices.

Citigroup's Mark Mahaney says he's interested in hearing on the conference call whether Google is making any headway in the fast-growing Asian markets, where it faces stiff competition from Yahoo! and local companies. Mahaney rates Google shares outperform.

"We believe that Google's second-tier ranking," he writes in a recent note, "would become an increasingly significant barrier to its ability to increase global query share over the next three to five years."

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