Friday, October 15, 2010

Google Tolls the Bell

Normally I don't comment on quarterly earnings, particularly for a company like Google, which professes to not try to manage quarterly earnings reports.

But in this case I want to make an exception.

Google's earnings numbers last night were astonishing, especially in a weak economy. True, some analysts will question the rapid rise in Google's costs (they have been hiring like crazy, adding more than 1,500 people last quarter to bring their total employment to over 23,000), or whether Google TV is a good idea or not.

But what really caught my eye was the amount of money the company now generates from their advertising, as well as their new Android phone (I have added the highlights in this excerpt from the New York Times):

Search advertising revenue still drove Google’s better-than-expected performance in the third quarter, when revenue climbed 23 percent and net income rose 32 percent. But for the first time Google said on a call with analysts, display ads — nontext ads with images and video on YouTube and other Web sites — are on track to generate more than $2.5 billion in revenue in the coming year, while mobile ads are on track to contribute another $1 billion.

“Where’s the next multibillion-dollar business after search?” said Jonathan Rosenberg, senior vice president of product management at Google, on the call. “There’s your answer. It’s display and it’s already here.” About mobile, he said, “Clearly this is the future of search and the Internet.”

I have attended a number of analyst meetings recently on technology companies, as well attending a presentation by a senior advertising executive from the ad agency Hill Holiday yesterday. While I knew that the pace of change in the digital age has been fast, I continue to be amazed at the pace of change.

First to the presentation yesterday. Stacey Shepatin has been involved in media buying for clients like John Hancock and Dunkin' Donuts (the official coffee of Random Glenings, by the way). Ms. Shepatin has been employed in the advertising business for 13 years, and her knowledge and presentation skills were impressive.

The most effective way to advertise a product, according to Ms. Shepatin, remains television. Americans are watching more TV than ever, especially live sports, and companies that want to build brand awareness need to invest in this space.

The second most important advertising venue was the digital space, i.e. the internet. Advertisers can get more "bang for their buck" on the web than they can on the traditional media outlets, like newspapers, magazines, radio and billboards.

This is of course an enormous change from a few years ago, but it also explains why traditional media companies are gradually dying. It also explains why Google is doing so well.

Google has more competition than you might think, by the way. One of the most surprising competitors (at least to me) was Facebook.

Justin Post at Merrill Lynch follows the internet space. When I saw him the other day, he pointed out that 14% of the internet traffic in the United States is spent on Facebook. Not only are people connecting on Facebook, they are also playing games on the site, which is how they wind up spending so much time on Facebook.

Facebook continues to expand, and are now a serious threat to overtake Yahoo in terms of email traffic. The next step for Facebook? According to Mr. Post, it might very well be search, which of course is Google's "bread and butter".

That's way some estimate that Facebook is worth $35 billion, even though the company is still a privately-held corporation.

For investors, all of this presents both challenges and opportunities. It seems almost indisputable that the internet space is one the fastest growing segments of our economy, but it is also not clear who the eventual winners will be.

Will it be device makers like Apple, which continues to amaze with its suite of products?

Or what about Amazon, which could eventually take its digital reader Kindle and turn it into a more direct competitor to the iPad?

Or what about the "old" technology companies like Oracle, IBM or Microsoft - their hardware and software products still are run by the majority of people in both home and business, yet the valuation of their stocks are very cheap; are they a buy?

And then there's this: At some point in the next couple of years, some of the most important digital companies that are now privately held will be coming public: Facebook; LinkedIn; Twitter; Zinga; etc. When these companies go public, will investors move dollars currently invested in names like Google and Apple into the newer offerings? What will this mean for their stock prices?

Lot's to think about on rainy Friday morning here in Boston.

Google’s Income Rises 32%, Topping Forecast -