Focus Time for Google - TheStreet

Focus Time for Google

A ho-hum reaction to a huge earnings beat suggests that its nonsearch products need to deliver.
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Another stellar quarter for

Google

(GOOG) - Get Report

may amount to yet another lackluster one for its shareholders.

On Thursday, the company

reported first-quarter results that handily beat analysts' expectations.

But for Google, an upside earnings surprise is no surprise at all. This quarter, it topped consensus forecasts for earnings per share by 11.5%. But it had beat estimates by roughly 8% for the two prior quarters and by about 12% for the quarter before that.

And while the stock rose slightly in afternoon trading on Friday -- shares were up 2.6% to $483.93 -- Google is still nowhere near the ever-expanding price target analysts seem to be placing on it. Goldman Sachs analyst Anthony Noto upgraded the stock on Friday and raised his price target to $620. Noto was among a legion of sell-side analysts issuing bullish research notes about Google on Friday.

Despite Friday's gains, Google's stock price is not much higher than it was in at the start of 2006, when it first traded north of $470. And though Google has turned its search ad business into a well-oiled money machine, it seems that investors have almost grown used to it. Investors are treating its constant, incremental innovation almost as though it's a company in the much more mature semiconductor or disk-drive industries, where impressive gains are the norm.

Sell-side analyst targets can be arbitrary, but Google's performance over the quarter was still impressive, says Adam Gold, an analyst at Entrust Capital. "Some people say that Google's reliance on search ads makes it a one-trick pony," says Gold. "But it's more like a stallion."

Still, Gold says that the lack of tangible gains by Google in the myriad other business opportunities it's pursing do present a complication. "They may announce a partnership with

EchoStar

(DISH) - Get Report

, for example, but we don't really know how much revenue that is," Gold says. "That is something we struggle with here."

So, if a blowout quarter and huge analyst support brought only a modest gain to the stock, it seems that investors should be concerned that a merely in-line quarter down the road could deliver a blow to its shares. Google's sideways stock price won't be disconnected from the company's performance over the long haul.

Google co-founders Larry Page and Sergey Brin may be on a mission to "organize the world's information" or some other idealistic outcome, but the vast majority of Google's employees are likely to harbor more financially oriented goals. They joined Google to get rich, but the stock options that make up a good part of their compensation may not be worth as much as they thought.

And with the resurgence of start-up activity and venture capital funding taking place in Silicon Valley, the top engineering talent that Google is banking on may be tempted to head elsewhere.

Google's frenetic pace of hiring, which is far outpacing revenue, is also troubling. Noto said that Goldman Sachs tracks Google's gross revenue per employee, which had been growing in the single digits until the fourth quarter of 2005.

But those numbers have since been in decline, with a 12% drop year over year for the first quarter. "I recognize that is because you're adding more new employees that are not productive," Noto said during Wednesday's conference call. "At what point do you think your existing employee base is large enough that your new employees do not cause your gross revenue per employee to decline?"

Schmidt replied that Google doesn't really count how much revenue it brings in per employee.

Then there's Google's exploding roster of experimental products. The company had more than 80 different projects going, according to a recent count. But Google doesn't emphasize revenue by product, either. "The primary focus and the primary management focus is around end-user happiness, end-user growth -- end-user everything," Schmidt said.

But critics point out that only a few Google products outside search, such as email and maps, have been a hit with users. The rest, meanwhile, may clutter up the company's game plan and spread management attention thin.

Google users would be better served if the company focused its vast resources on a few key products instead. So, too, would Google investors.