Google: Still Going Gangbusters

First-quarter profits sailed over most analysts' optimistic predictions, and not much is likely to slow the search giant down

by Robert Hof

Will the Google juggernaut ever stop rolling? Judging from the search giant's first-quarter performance, nobody had better bet on it.

The search giant is routinely expected to top earnings estimates, but its first-quarter results far outpaced most expectations. On Apr. 19, Google (GOOG) reported a net profit of $1 billion, up 69% from a year ago on a 63% jump in sales, to $3.66 billion. The $3.68 a share that it earned before subtracting stock options and other one-time expenses easily topped analysts' estimates of $3.30 a share. "We are ecstatic about our financial results for this past quarter," Chief Executive Eric Schmidt told analysts during a conference call.

Investors Love This Stock

As a result, investors seem inclined to keep buying Google despite its $471.65 closing price on Apr. 19. They boosted shares in extended trading by almost 3%. Partly, that's because the hot air in Google's stock has actually cooled in the past year. Shares have risen about 15% in the last 12 months even as earnings shot up about 70%. "If you own anything in this sector, this is it," says Scott Devitt, an analyst with Stifel Nicolaus (SF).

But even though Google doesn't offer specific earnings guidance to analysts, its continuing growth and seemingly boundless opportunities clearly appeal to investors (see BusinessWeek.com, "Video View: Google's Giant Growth"). The company's revenue is growing at twice the rate of the Internet ad business overall and nine times faster than sales at rival Yahoo! (YHOO). "The competitive landscape has moved in [Google's] favor," says Devitt.

Indeed, the results only served to hammer home the lead Google keeps building against rivals. On Apr. 17, Yahoo reported disappointing earnings, thanks to a slower-than-expected boost from Panama, its new search ad system (see BusinessWeek.com, 4/18/07, "Yahoo's Next Search: A New CEO?"). Yahoo's profit fell 11% on a 7% rise in sales, sending the company's stock down 14% in the past two days.

Hammering Rivals

What's more, Google keeps extending its lead in Web search. Already commanding more than half of all search queries, Google continues to post much higher growth than either Yahoo or Microsoft's (MSFT) search tools. According to market researcher Nielsen//NetRatings (NTRT), Google searches grew by 40% in February, the latest month available, compared with a 12% increase for Yahoo and 9% for Microsoft.

The positive earnings surprise comes as Google has continued to make aggressive moves into offline advertising and further into Web ads. On Apr. 13, Google announced a $3.1 billion deal to buy digital ad services firm DoubleClick as a way to move more forcefully into online display ads (see BusinessWeek.com, 4/14/07, "Google's DoubleClick Strategic Move"). And on Apr. 16, the company announced a deal with Clear Channel Communications (CCU) to sell ads on 675 radio stations. Those deals followed a recent agreement with EchoStar Communications (DISH) to place ads on the satellite-TV network.

Part of the quarter's profit growth came because Google spent a bit less than expected. But whether that trend will continue is doubtful. Google hired nearly 1,600 new employees in the first quarter alone, continuing its annual pace of nearly doubling its workforce, now at more than 12,200 people.