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Below the headline thoughts on Google...


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April 21, 2006

Below the headline thoughts on Google...

Tim Mullaney

Come from Marianne Wolk of Susquehanna Financial Group. Before I quote it, let me set some context. Two reasons I've been hanging in there with Google in the BW Web 20 portfolio of blue-chip Net stocks that I coordinate and in the periodic investment guide issues we do are:

* The prospects to expand the search business into local advertising and

* The idea that the AOL deal will let Google experiment with different forms of advertising -- both display ads and especially ads that let Google experiment with performance-based pay. AOL's Advertising.com unit is the leader in so called cost-per-action advertising. "CPA" advertisers don't pay a little for each click, as they do when buying cost-per-click or "CPC" ads from Google. Instead, they pay a lot more --but only pay at all if customers do something like ask for a brochure, place a phone call to the advertiser, or buy something. If the customers don't act, the ad is free. I think CPA is going to be a big market -- how big, how soon I have to research some, and Google's plans for CPA are publicly vague. But its growth doesn't require that Google take over someone else's business in some totally unrelated field like telecommunications or real estate. In other words, believing in its likely success doesn't require me to believe in any of the Google-Is-Omnipotent silliness that crops up now and again.

And the reason I've sometimes wondered if I'm right about Google is capital spending, which is my proxy for residual fear that this company, still very much a reflection of its founders' personalities, is not managed with enough discipline to prepare for any hard times to come.

Wolk seems to be with me.

Says the report (which Susquehanna gave us leave to reprint in full):

*Local advertising becoming a more significant growth driver and should accelerate as mobile applications are more prevalent. Please refer to our recent report issued April 10, "Google on the Go," which describes the $100+ bln local opportunity in the U.S. Positive Factor

? Fly in the ointment? Capital expenditures are soaring as Google pursues new growth opportunities. This quarter, capex was 34% of EBITDA and 42% of operating cash flow. We are raising our capex estimate to $1.5 bln for 2006, up from our prior forecast of $1.2 bln. Google is aggressively spending operating cash flows on servers, storage, network equipment, and data centers - presumably to improve ad targeting and support major new growth opportunities in the mobile, display, enterprise, and local spaces. Negative Factor

? Wild Cards: AOL investment and uses of cash. Google closed its $1 bln investment in AOL in April; we expect it to yield interesting opportunities in video and display advertising. Google raised $2.1 bln this quarter through a secondary offering. We believe it is likely to look at investments to expand its share in Asia (one of the few markets where it is not #1), build presence in the mobile or enterprise markets, or acquire storage, spectrum, or software. Please refer to our report detailing potential acquisition targets, "Google Closes Secondary Offering," issued April 3. Positive Factor

09:27 AM

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