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Ever since Google went public on Aug. 18, 2004, at $85 a share, its been all sunshine. But as the company heads into a March 2 meeting with Wall Street analysts, its becoming clear that the company is entering adolescence and facing some awkward moments ahead.
In other words, the first incarnation of Google could be defined as a corporate beta phase—a honeymoon, if you will.
What happens from here will be far more interesting. At the least, Google will face “much greater scrutiny” at its analyst shindig, says Citigroup analyst Mark Mahaney.
Up to this point, Google could experiment, rattle Microsoft with new projects, hire 50 to 60 people a week and essentially do no wrong.
Financially speaking, Google may have had the best beta phase ever.
For 2005, revenue was 92.5 percent to $6.4 billion with net income of $1.46 billion, up from $399 million a year earlier.
Sure there was some Wall Street consternation over the fourth quarter tally since Google only reported fourth quarter net income of $372 million on revenue of $1.92 billion, but who is going to seriously quibble about those figures?
However, there are signs that Google is exiting the love affair stage and may have to worry about all those things other companies have to worry about—managing expectations, balancing growth and profit margins and tackling new markets.
Indeed, Google Chief Financial Officer George Reyes on Feb. 28 just happened to mention at a Merrill Lynch investment conference that maybe the law of large numbers will slow the companys growth. Whoops.
The stock fell 7 percent to $362. Still pretty heady compared to the IPO price, but down a bunch from the high of $475 just a few weeks ago.
Now the fun really begins. How will Google evolve as a company?
Key Questions
No one really knows, but here are some key questions to ponder as a grown-up Google emerges. Feel free to cook up a few of your own in Talkback.
- How will Google invest in its technology? Google is a great example of a company that took an IT blank slate and built a great network with cheap Linux boxes.
Now it has to increase its capital spending to add capacity and expand internationally. Merrill Lynch analyst Lauren Fine estimates Google is hiring 50 to 60 people a week and investing heavily in technology and real estate.
In the fourth quarter, Google spent five times more on capital spending than it did the year before.
- Will Google become evil? When Google was smaller, it was easier to buy into the “do no evil” mantra in its IPO prospectus.
Not that I bought it, but it was entertaining reading.
Now that the company is larger it may be a little more difficult to take its anti-evil chatter seriously. Just look at the target Google has become over its China business.
How can Google maintain its motto as it grows? When you get that big, you are always evil to someone.
Meanwhile, what happens if you only leave a door open to evil in the form of security breaches via Google Desktop?
- Wheres the return on Googles new products? While new applications are fine and dandy, Wall Street is going to be looking for a return, or monetization in Web jargon.
“Reportedly, Google has a list of Top 100 R&D projects,” says Mahaney.
“What isnt clear are the financial screens Google applies to determine which projects get allocated the most resources.”
Obviously, things like Google Base and Google Payments could be worth a lot in the future, but the proof is in the profits.
- How will Google react to its gawky teen years? Remember Yahoo back in the dot-com boom. Cocky and brash. Worth more than Disney. Ready to conquer the world.
Well, along the way it alienated advertisers and lost its mojo. It overturned its management team and grew up a good bit. It doesnt take a rocket scientist to figure out Google could go through the same evolution.
- Should we worry about click fraud? Keyword prices go up, so does the incentive for fraud. Its not a big leap. The big question is what Google is doing to correct the issue. When a company relies on keyword advertising for most of its revenue, click fraud cant be dismissed lightly.
- Is it wise to target Microsoft? Few have won going head-to-head with Microsoft, but Google clearly has the Redmond-based behemoth playing defense.
Indeed, rumor has it Google cooks up projects just to see what Microsoft will do. A nice touch, but it may be too early to count Microsoft out. Nevertheless, all of my searches go through Google.
MSN who? Watch for what Google does on the desktop. Hard to see Google supplanting Windows, but you never know.
Mahaney estimates that Google is pulling ahead of Microsoft in search, but Vista and the latest version of Internet Explorer should change the equation.
“The Microsoft competitive risk remains very real,” says Mahaney.
Larry Dignan can be reached at ldignan@ziffdavis.com.