It was another stonker for Google. As a result, Microsoft was left cursing, and comScore, the company that provides the definitive statistics on internet advertising in the US, was left with egg on its corporate face.
Profits at the company were up again, this time 30 per cent higher than in the first quarter of 2007, hitting $1.31 billion, a new quarterly record for the company.
Much of the success was down to overseas expansion, with 51 per cent of sales coming from overseas. Mind you, the dollar is down sharply from the euro a year ago. Last March for example there were around 0.75 euros to the dollar, yesterday there were 0.62. In fact, Google says the falling dollar had the effect of boosting sales by around $202 million. So that helped. Then again, total sales jumped 42 per cent to $5.19bn, so even if the dollar had stayed flat, the company would still have enjoyed strong growth.
In fact, the UK is one of Google’s most important overseas markets, and the pound–dollar ratio has not actually changed that much over the time period.
Of course, all those who laughed at Google’s apparently astronomical share price when it was floated don’t look so smart now. At the time memories of the dotcom crash returned The cynics argued the share price was grossly overvalued. Yet it appears they were wrong.
The company was floated in August 2004, with a launch share price of $85, giving it a market valuation of around $30bn. Yet even if the company stops growing, and just matches the Q1 performance for the rest of this year, it will make a total profit of $5 billion in 2008, or a healthy sixth of its valuation four years ago.
The trouble is, of course, the share price has risen sharply since then. Shares are now trading at $442, so they are up slightly more than fivefold. Profits have increased 25-fold since the quarter when the company was first listed. So profit growth has greatly exceeded growth in the share price. Even so, the company is now valued at $140 billion. Analysts say its valuation expressed as a ratio of predicted future earnings – that’s its p/e ratio, is now around 34. So the share price is still high, but easily justified if the company can continue its rapid growth for another couple of years.
So the question then is, how much will the global economic outlook hit the company, and in any case, is the search engine business a mature business, now?
Intriguingly, Google’s top product management executive Jonathan Rosenberg even started to talk about the UK’s property market. Apparently, Google has noticed “healthy growth” in the UK for terms such as “mortgage rates.” So it appears the credit crunch is making Google even more important. As Mr Rosenberg said, “Every foreclosure becomes a home sale to somebody.” Then again, Mr Rosenberg said that the UK property market has been in a downturn for even longer than the US. As you know, that is simply not true, so the argument then loses something of its credibility.
But then, talking of credibility, comScore has got a lot of explaining to do. It had said that it had evidence click-through revenue at Google had stopped growing. This had created fears that the company was either being hit by the credit crunch, or worse, it had simply moved into a new phase of the company’s development: a mature phase.
Yesterday, Google’s CEO put that to rights. “It’s clear to us that we’re well-positioned in 2008 regardless of the business environment,” said Eric Schmidt. He added, “Paid click growth has been higher than speculated by third parties.”
So that’s pretty clear then, there’s plenty of growth left under the pay per click advertising model bonnet.
Google scored points over the analysts too. The trouble with per-click revenue is that it is open to fraud. How does a company know that the clicks it is receiving are from people genuinely interested in its products? Earlier this year Google answered those fears saying it is going to cut down on the volume of ads, so as to improve quality. It expected to be able to up prices as a result, but analysts were not so sure. As a result the Google share price had fallen from north of $700 to just a few dollars above $400 a few weeks ago. So once again, Google’s rising profits show that it got it right, the analysts wrong.
And so, Google, IBM, eBay and Intel have all revealed healthy growth recently. So the omens must be good for Microsoft, then.
Well no. Instead, Microsoft is more likely to be saying “shucks.”
As you probably know, it has ideas. It wants to own Yahoo, but the number two search engine company is not rolling over and coming quietly.
If Google is doing better than was thought, then Yahoo, which is looking at a tie-up with Google and a merger with AOL as an alternative to the Google offer, must also be looking good. That means Microsoft might have even more problems getting the company to agree to its offer.
Mr Schmidt made the most of the opportunity to rub Microsoft’s nose in it. “It’s nice to be working with Yahoo,” he said. “We like them very much.”
So what does the future bring? Google’s big plan for the future is in the mobile phone market, with its product Android - the idea to apply its pay-per-click model to mobile phones?
Will it work? If it is successful, then the heady growth will continue for many more years. But up to now, Google’s success has revolved around one product, its search engine. Other moves have not really been that successful. And just because Google has enjoyed such phenomenal success in one sphere, it is by no means guaranteed it will enjoy similar success in another, new, area.
Comments
Trackbacks