A strong holiday shopping season will help Google Inc beat Wall Street's quarterly targets again, but investors may need more convincing to buy into the Internet giant's longer-term future.
Google, whose shares underperformed the market in 2010, will need to overcome past failures to get onto the social Web and local advertising, twin areas that threaten to siphon off Internet traffic, and advertising dollars.
Now, the world's top Internet company is recruiting and driving an acquisitions spree, aiming to ensure its online products remain popular as surfers turn to new services like Facebook, now the most heavily trafficked site, and wireless gadgets.
It tried to buy fast-growing online local-shopping service Groupon for $6 billion but was rebuffed, Chicago Breaking Business, a Tribune Newspaper website, and other news outlets reported.
"The key opportunity for Google in 2011 is to prove that the transition to mobile, social and local is a graceful one," said Stifel Nicolaus & Company analyst Jordan Rohan. "Google cannot be perceived to be run over by Amazon.com, Apple, or Facebook."
The competitive landscape will be uppermost on investors' minds given recent events at rivals, such as Apple CEO Steve Jobs' medical leave of absence and Facebook's $50 billion valuation. Google stock rose 2.5 percent on Tuesday after the surprise Jobs news.
Google has made a good start with its Android mobile operating system now on more phones than Apple's software. Investors will be eager for updates on those fronts when the world's No. 1 Internet search engine reports fourth-quarter financial results after Thursday's market close.
But the question is whether Facebook's success could start to cut into Google's business, as investors debate whether marketers will advertise on both online services, or shift advertising dollars from Google to the world's largest social network. "Facebook's the long-term competitor, not Bing," said Walter Price of RCM Capital Management, which owns Google and Microsoft shares, referring to Microsoft Corp's search engine.
Google, which has beaten Wall Street revenue expectations for the past five consecutive quarters and missed profit targets just once in that period, is expected to report net revenue of $6.06 billion for the fourth quarter, up roughly 10 percent quarter-over-quarter, with earnings per share of $7.14, according to analysts polled by Thomson Reuters I/B/E/S.
Spending on search advertising remains healthy in the United States, the company's single largest market, propping up the topline, said Kaufman Brothers analyst Mayuresh Masurekar.
Retailers and e-commerce Web sites had pumped up their spending on search advertising during the holiday to lure customers and "capture every available lead," he said.
Google's growing staff (the company added roughly 3,500 employees in the first nine months of the year) and its unpredictable capital expenditures schedule mean that earnings per share will be a wildcard, said Gleacher & Company analyst Yun Kim.
Yet as long as EPS is in-line and Google delivers strong revenue growth, investors will be appeased, he added. In October, Google's shares gained more than 10 per cent after the company beat third-quarter profit and revenue expectations.
During the post-earnings conference call in October, Google gave investors what it said was a "one-time" peek at some of its businesses beyond search, revealing that it was generating $2.5 billion in revenue from display ads on an annualized run rate, and $1 billion from its mobile business.
"They kind of gave people the confidence that even though search slows down there are levers that Google can pull to keep growing," said Kaufman's Masurekar.
Social weak spot
Google has launched a flurry of new services in recent months, including an electronic bookstore that competes with Amazon and Barnes & Noble Inc, and a Web TV service which, despite receiving lackluster initial reviews, could eventually open the door to important advertising opportunities.
Android, Google's 2-year-old smartphone operating system, has emerged as one of its strongest initiatives. More than 300,000 Android phones are sold every day, and Android ranked as the second most popular smartphone operating system in the third quarter, ahead of Apple's iOS software, used in the iPhone, according to industry research firm Gartner .
But Google has shown itself less adept when it comes to Internet social networking, where Facebook dominates. In 2010, Facebook displaced Google to become the most visited Web site in the United States, according to Experian Hitwise. And advertisers are increasingly warming to the service: according to a Goldman Sachs document, Facebook generated $1.2 billion in revenue in the first nine months of 2010.
No wonder some say Google runs the risk of becoming another Microsoft, dominant in one area but abruptly and rapidly eclipsed in fast-growing new markets by up-and-coming rivals. "Google needs to step up in social or it runs the same risk that Microsoft does of having the (stock's price-earnings) multiple degrade," said RCM Capital's Price.