Google Silences Doubters With 30% Growth

Investors who had driven Google (Nasdaq:GOOG) stock down recently on fears that growth at the internet behemoth would slow got a pleasant surprise last week when the company announced a 30% increase in earnings for the quarter. The quarter showed that the company is still growing at a fast pace and that fears were overdone.

Don't Worry, Google's Fine
After trading closed on Wednesday, April 16, Google reported a 30% rise in first quarter earnings to $1.31 billion ($4.12 per share) from $1 billion ($3.18 per share) in the first quarter of 2007. If not for charges associated with giving stock to employees, Google reported that it would have earned $4.84 per share, which beat the consensus analyst estimates of $4.52 per share by a large margin. (To learn more, see The Controversy Over Option Expensing and The "True" Cost Of Stock Options.)

Growth was healthy on the top line as well. Google reported revenue of $5.19 billion for the first quarter, up 42% from $3.66 billion a year earlier. Taking out the commissions paid to Google's advertising partners, revenues stood around $3.7 billion, beating analyst views by about $100 million. Overall, the quarter was great, showing that the company is still growing by leaps and bounds.

A Click Here, A Dollar There
The stock rose more than 18% on the news, after concerns over Google's future growth have led the shares down for months. In early November of last year, the stock had traded above $740, and recently was trading around 40% lower than that level. Concerns started to grow when advertising "clicks" started to decrease, and investors started to wonder if Google was a little more closely tied to the economy than previously thought. Paid advertising clicks increased 20% for this quarter, however, largely dampening those fears. Baidu.com(Nasdaq:BIDU), Google's main competitor in China also rose more than 8% on the news.

Google has a stranglehold on the search industry, and text advertising. Its weakness has been display advertising, an area of the company that it is growing. Display ads are competitor Yahoo's (Nasdaq:YHOO) specialty. Yahoo is in the middle of a bid by Microsoft (Nasdaq:MSFT), which would be the biggest threat to Google right now. The combined entity would be a more formidable competitor to Google, rather than the two separate entities that have been struggling to keep up. Google has been working out a deal to cross advertising with Yahoo. Tests have been run recently, and seem to be a way to stifle the merger. Even though a combined Yahoo-Microsoft poses a somewhat greater threat to Google, I don't think it would change much. Google will still lead the search market.

The search giant is still growing strong and I think the stock looks attractive - even with the recent rise in price. The shares are now trading just over 20 times forward earnings estimates, which is not even accurate. The number will come down as many analysts will be revising their forecasts for Google upward. With this in mind, I feel the company is trading very cheap compared with its growth rate.

The Bottom Line
Google topped the expectations of Wall Street analysts and reported a great quarter with 30% growth. This shows that much of the recent concerns about the company's business were overblown. Even with the rise in the shares, Google is at a very attractive price considering its growth rate.