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Google (GOOG)
Google's Growth Declines
Google (GOOG: Charts, News, Offers) reported that its first quarter net income rose 8.9% to $1.42 billion from this time last year. However, a closer look at Google's quarterly report also revealed that the world's most popular online search engine experienced its first sequential drop in sales since 2004. This news seems to have been bitter-sweet for investors. Wall Street's initial reaction was very positive, but the momentum appears to be slowing down. How was Google able beat expectations while experiencing a drop in sales? What does this report mean for Google's future?
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The online powerhouse managed to post such an impressive net income with its effective cost management strategy. Google, a company notorious for expansion, cut its total workforce number with three rounds of layoffs. In addition, Google scuttled several side projects from the budget such as its radio advertising initiative. Overall, its capital spending declined 40% from last year's fourth quarter. Google also received a slight boost in performance from its online advertising.
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Google reported that paid clicks for its text based search ads increased 17%. Although there was a spike in clicks, the bid prices for these clicks declined due to the economic downturn. It appears that consumers are doing a lot of "window shopping" and not necessarily buying anything. As a result clicks have increased, but advertisers are not willing to pay as much for them. Overall, industry experts speculate that the increase in clicks balances out the drop in bid prices. However, Google did note that many advertisers are increasing the online portion of their marketing budget to take advantage of online advertising's high return on investment. Most of these advertisers are shifting dollars from other media channels to online. Google's effective cost management and increase in advertiser's online spend levels were the leading factors for its first quarter performance.
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Google's first quarter report has illustrated that the floundering economy and dynamic nature of the online industry can be a very slippery slope to climb. The world's most popular search engine realizes that in order to climb this slope, or in Google's case stay at the top, it needs to focus on the future. Google has several projects in the pipeline that it hopes will add further value to the company. In an attempt to spark online advertising performance, Google intends to re-launch its YouTube AdSense ads. The first rendition of the YouTube AdSense project failed, but Google hopes that targeting ads based on users' browsing history and interests as oppose to search queries will perform better. In addition, the online titan has closed deals with Sony (SNE: Charts, News, Offers), CBS (CBS: Charts, News, Offers), and Metro-Goldwyn-Mayer to show their movies and television shows online. Although the actual implementation of this content is still unknown, it demonstrates Google's commitment to the future. Google has also mentioned that it is interested in achieving an advertising partnership with Twitter.
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It is now evident that the struggling economy is even slowing down Google. Although the web company is still posting an increase in profits, its rate of growth is declining. Google has a few projects that it hopes will help boost its growth rate and overall performance, but it has been very cautious about its forecast of upcoming quarters. Google has benefited from its recent cost management plan, but it is also aware that constant cost reduction is not a sustainable method for increasing profit growth. The current economic climate is surrounded by uncertainty, and Google has admitted that this is "uncharted territory" for them. Only time will tell if this online titan can safely navigate the online industry's unknown terrain.
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