Being a darling of investors isn't always easy. In the wake of relatively strong showings by Internet giants eBay ( EBAY) and Yahoo! ( YHOO), Wall Street is expecting another big quarter out of Google ( GOOG) come Wednesday afternoon, when the company announces fourth-quarter results. But unlike eBay and Yahoo!, Google enters the spotlight with already high expectations. The search giant, which tore apart earnings and revenue estimates for its third quarter, is judged by a different yardstick. Along with strong revenue, the company likely will have to provide bullish commentary on its progress in some of its key business initiatives. Earnings, along with the expenses that may have eaten into them, also will be heavily scrutinized. Analysts surveyed by Thomson First Call are forecasting earnings per share of $2.92 on revenue of $2.19 billion. But since its last earnings blowout three months ago, shares of Google have performed relatively modestly, rising 7.5% to $494.32. That's despite a three-month period in which the company not only steadily picked up search market share, but also sidestepped apocalyptic predictions that it had bought a hornet's nest of lawsuits when it acquired video-sharing site YouTube. In addition, Google upped its ante in the burgeoning mobile market and put its muscle behind a well-received payment service that promises to drive more advertisers into its fold while vanquishing rivals.
Still, the stock heads into the fourth-quarter report trading at 35 times forward earnings, shy of fumbling Yahoo!'s 38. Moreover, the price-to-earnings-to-growth ratio -- which determines how expensive a stock is compared to expected growth -- shows Google at a mere 1.48 compared to Yahoo!'s 2.08. But Google's almost sole reliance on one source of revenue, online advertising, continues to be a source of (relative) anxiety for investors. And while it's far too early to turn on the money spigot for the other lines of business the company is pursuing, Wall Street will be watching closely for signs of progress. "Although revenues from new initiatives are most likely immaterial at this stage, we expect increased traction with video, radio, newspapers and software will drive incremental revenues over the next 3-5 years, which could be a stock catalyst," wrote Merrill Lynch analyst Justin Post in a note to clients on Tuesday. Investors also may be comforted by more news about the olive branch Google recently extended to traditional media companies. Post writes that Google may be negotiating a deal with CBS ( CBS) that, along with allowing the monetization of television content, could open up radio inventory for Google's radio advertising ambitions. Promising words about traditional media partnerships and airtime also could bode well for shares of Google, Post writes. Merrill Lynch makes a market in Google shares.
Among the most closely watched Google initiative will be its Checkout online-payment service. Citigroup analyst Mark Mahaney calls it "one of the most significant product launches for Google in 2006" and estimates that Google could have devoted up to $80 million promoting Checkout in the form of rebates to customers and free processing for merchants. Although the service was launched in the summer of 2006, it got its most aggressive push from Google during the holiday season. Mahaney estimates that the service grew from being accepted at 135 online stores in July to 240 in December, and that the Checkout logo grew in December to 4% of commercial search queries, from 1.5% in July. But Mahaney writes that questions remain, ranging from how confident Google is that it can handle the risks of fraud associated with payment services to how long it plans to push consumers to use it. Citigroup has an investment banking relationship with Google. Like other published estimates, Mahaney's show that Checkout has been quite successful given its limited time frame, but still has a long way to go before it can compete with eBay's market-leading PayPal. The success of Checkout -- along with the innovativeness of Google's future plans to promote it -- could provide insight about Google's ability to translate its dominance in the search market beyond its traditional playground and into the realm of more entrenched and experienced competitors. A better-than-expected showing coupled with a strong game plan would reflect well on Google's many other initiatives.
Similarly, the company's plans for YouTube warrant close attention, despite the paltry $10 million in revenue that Mahaney expects the deal has added to Google's coffers. Its YouTube strategy could provide a clue as to how -- among other avenues -- Google plans to muscle into the display-advertising market, where Yahoo! is the leader but could be vulnerable to pressure from Google's increasingly popular set of properties. Along with new frontiers, Google's fourth-quarter results also revisit old worries. Chief among them is the company's mounting costs, with capital expenditures appearing to grow faster than revenue. Merrill Lynch expects $2.07 billion in capital spending for 2006, a growth of 147% year over year. Of that amount, $536 million comes in the fourth quarter, a growth of 118% year over year and 9% sequentially. Basking in the glow of Google's stunningly profitable third quarter, CEO Eric Schmidt scoffed at Wall Street's perpetual hand-wringing about out-of-control capital costs, saying that the scrutiny helped the company boost performance instead. This time around, with significant investments in new endeavors that have yet to pan out, that concern could take center stage.