Google: What Goes Up...

Ad clicks are flat, the stock is falling. Can the enchanted corporate giant keep the magic from fading?

by Robert Hof

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Justin Wood

Google (GOOG) is finally discovering gravity. First, the company missed Wall Street revenue forecasts in the fourth quarter for the first time. Then a pair of reports from market researcher comScore (SCOR) , the latest on Mar. 26, said U.S. growth in the number of clicks on the paid ads appearing next to Google's search results essentially flatlined for two months running compared with a year ago. Six months ago, paid clicks were growing up to 40% annually.

The combined news was enough to send sentiment about Google crashing to earth. Its stock price has plunged 38% from its all-time peak, an intraday high of $747.24 last November, one of the worst performances by a blue-chip tech stock. The big worry: A tanking economy could ground the company's unparalleled rocket ride. "The whole Street has turned cautious," says American Technology Research analyst Rob Sanderson, who notes that 16 analysts out of about three dozen have cut Google's first-quarter profit estimates. "Everyone's scared."

Perhaps such a sudden shift in momentum was inevitable for a company that seemed nearly invulnerable thanks to a hugely profitable business and search technology so useful its very name became a verb. But it also may signal that the company is facing a moment of truth, one that previous tech phenoms such as Microsoft (MSFT) also faced: Can it hold on to the magic that has made it perhaps the world's most enchanted corporation?

Departures from google

New challenges are piling up. For one, some key people are leaving for new, potentially more lucrative opportunities. They include Sheryl Sandberg, the top sales vice-president who departed last month to become chief operating officer at Facebook, and Douglas Merrill, a high-profile engineering vice-president who will leave Apr. 28 to be EMI Music's president of digital business. Moreover, Google's seemingly scattershot attempts to find new avenues of growth in everything from online video ads to office software to wireless communications so far haven't produced much revenue. And rivals from startups such as Facebook to behemoths such as Microsoft are intensifying their attempts to capture large new chunks of online commerce before Google does.

Much of the concern about Google's business could prove unfounded. When the company reports first-quarter results on Apr. 17, revenues are expected to surge at least 40%, to $3.5 billion, while profit per share will likely rise 22%, to $4.50, despite a hiring binge last year and higher research and development costs. Google CEO Eric E. Schmidt and other executives maintain they're not yet seeing an impact from the economy.

Still, it's unclear how well Google's unusual management will be able to deal with the more challenging times. The triumvirate of Schmidt and cofounders and presidents Sergey Brin and Larry Page has encouraged a unique, just-do-it culture that helped it get this far this fast.

But the eccentricities investors found charming when the stock was soaring may test their patience if shares continue to fall. The company provides no guidance to financial analysts.