Google Grabbing Global Market Share

The search boss should exceed its numbers and possibly show signs of outrunning Yahoo!.
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That underwheming earnings report that

Yahoo!

(YHOO)

posted earlier this month could be a positive harbinger for

Google

(GOOG) - Get Report

.

Let's start off by turning back the clock on Google, which will report fourth-quarter and fiscal-year 2005 results after the close.

After posting a super second quarter last summer, Google's shares took a hit. This was not due to the company's results or its outlook, except for one silly little item.

Management used the term "seasonality" on the conference call to describe its business conditions for the upcoming third quarter. Seasonality is a heinous description for the outlook of a fast-growing company.

What the company meant was not seasonality in the traditional Wall Street sense, but the damage was done. This episode caused the stock to dip over a few weeks before it rebounded to maintain a price level in the low $300s. That was until third-quarter earnings were released.

A Change in Conference Call Strategy

By an act of genius or through sheer luck, Google reported third-quarter 2005 results the evening prior to October options expiration. The company had enjoyed another spectacular quarter, besting Street analysts' consensus by 11% for the second straight quarter. There was no mistaking that the "seasonality" gaffe in the prior quarter was more the product of a management team that was inexperienced in the ways of Wall Street and putting on a good earnings conference call than it was of the true expectations of a slowing growth trend for the business.

This time around, management was well prepared and coached as to how to conduct its earnings call. The business was in solid shape, growth was ever increasing and there was no doubt that Street estimates would have to be taken up.

With the huge short position in at-the-money and just out-of-the-money call options providing rocket fuel to the great quarterly results, Google shares jumped nearly 12% on the day after earnings were released. This set in motion a series of analyst target increases (ignoring the sublime one for Google to hit $2,000), which helped to propel shares on a three-month rally of around 56% to a high of $475.11 on Jan. 11. Since then, the stock has backed off a little and stood at $433.49 as we closed out trading last week. (Google closed at $426.82 Monday, down $6.67, or 1.54%.)

To view Angela Ottomanelli's video preview of Google, click here

.

For the fourth quarter, Google is expected to earn $1.76 a a share on revenue of $1.29 billion. That compares with EPS of $1.51 on revenue of $1.57 billion in the third quarter of 2005, and EPS of 69 cents on revenue of $1.03 billion in the fourth quarter of 2004.

However, many questions were raised after Yahoo! delivered a less-than-stellar quarter earlier this month. After listening to the Yahoo! conference call and noting Yahoo! missed its EPS and revenue targets, I had to wonder:

Did Yahoo! simply get beaten by Google?

Despite Yahoo! management's belief that it gained market share, did Google grab more market share?

Are advertisers voting with their wallets and have they selected Google over Yahoo!?

So is Google pulling away from Yahoo!? I have no doubt that Google will likely exceed its numbers. By all anecdotal indications, Google is grabbing market share in a fast-growing global market. This is great two-dimensional growth. In addition, we can add a third dimension -- deals with all of the smaller businesses and technologies that Google is investing in away from paid-search advertising.

Google shares took a hit on the January options-expiration day selloff. This was in part due to the expiration effect and partly due to concerns over Google's potential legal imbroglio with the Bush administration over user-privacy information. This simply created a vacuum in Google's share price, which was filled the following week.

It was always my intention to take profits on part of our Google client positions heading into earnings. We did not want to sell into the expiration panic, so we waited until the week after expiration when Google shares rebounded, and sold off about 40% of our positions, much of which we own below $200.

Google is going to be a battleground this week, for traders, investors, analysts and the media, so I am happy we found a good level to take some Google risk off the table.

At the time of publication, Rothbort was long Google.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded

LakeView Asset Management, LLC

, a registered investment advisor based in Millburn, N.J., which offers customized individually managed accounts to its clientele. In addition, LakeView Asset Management, LLC has developed and manages trading of long/short proprietary index strategies. Rothbort is an adjunct professor at the Stillman School of Business at

Seton Hall University

. Prior to that, Rothbort worked at Merrill Lynch for 10 years. During his tenure at Merrill, he was instrumental in building the global equity derivative business, started and managed the global equity swap business and oversaw and coordinated the secured funding, collateral management and collateral identification for the global capital markets group and corporate treasury of Merrill Lynch.