Google rides Internet ad wave as profit soars 46%
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SAN FRANCISCO -- Less than two weeks after its stock price smashed through $600 for the first time, Google Inc. showed why it might not be long before the Internet search leader's shares are flirting with $700.
Even with more people enjoying the summer weather instead of surfing the Web, Google churned out another quarter of astounding earnings and revenue growth likely to propel its stock to new heights today.
The third-quarter results, released yesterday, surpassed analyst expectations and demonstrated why Google has emerged as Silicon Valley's most prized company with a market value of more than $200 billion after just nine years in business.
"We're strong and getting stronger," Google Chairman Eric Schmidt said in an interview yesterday. "What I am most pleased about is our model works."
Investors are happy too. Google shares surged to a new high of $658.49 in this morning's trading before dropping back to $646.57, up $6.95.
The healthy boost thrust the Mountain View-based company's market value even further ahead of Cisco Systems Inc.'s in Silicon Valley's pecking order.
Microsoft Corp., which started when Google co-founders Larry Page and Sergey Brin were still toddlers, is now the only high-tech company worth more than the Internet search leader.
As it has been for several years, Google reaped the benefits of running the Internet's most popular advertising network as more marketing dollars shift to the Web from television, radio, newspapers and magazines.
Meanwhile, long-established media are suffering. For instance, third-quarter advertising revenue at three major newspaper publishers -- Gannett Co., McClatchy Co. and Dow Jones & Co. -- declined by a combined $125 million, or 6 percent, from the same period last year.
Chris Winfield, who runs the search engine ad firm 10e20, says Google has become the Internet's equivalent of the Beatles during that rock group's heyday in the 1960s. "It's pretty amazing. It's almost like they are in control of the world."
In the third quarter, Google earned $1.07 billion, or $3.38 per share, for the three months ended in September. That was up from net income of $733.4 million, or $2.36 per share, at the same time last year.
If not for the cost of awarding stock to its steadily expanding work force, Google said it would have earned $3.91 per share. That topped the average estimate of $3.78 per share among analysts surveyed by Thomson Financial.
Revenue for the period totaled $4.23 billion, a 57 percent increase from $2.69 billion last year.
After subtracting commissions paid to its thousands of advertising partners, Google's revenue stood at $3.01 billion -- about $70 million above the average analyst estimate.
The performance represented a return to form for Google after its second-quarter earnings disappointed Wall Street. The company has surpassed analyst estimates in all but two of the 13 quarters since its August 2004 initial public offering. As a result, Google's stock price has increased more than sevenfold since the IPO.
RBC Capital Markets analyst Jordan Rohan is among those who still sees plenty of upside in stock. After digesting Google's third-quarter results, he raised his price target for the stock to $725, up from $690 previously.
"At a high level, Google remains the company with the strongest fundamentals in the Internet," Rohan wrote in a research note today.
Although it relies on complex technology, Google's business formula is fairly simple. As it processes a search request, Google also scans its database for text-based ads related to the same topic as the query and displays the commercial messages along the side and top of the results page.
Google gets paid when someone clicks on an ad on its pages or on one of its partners' sites.
There's ample opportunity to display ads, with Google fielding about 1.2 billion search requests worldwide per day, based on the latest data from comScore Inc. That's more than quadruple the number of requests handled by Yahoo Inc., which runs the second-largest search engine.
While becoming even more dominant in search, Google also is branching in new directions that are creating new ways to sell ads and opening up potential new revenue channels in the software applications market.
In the past few months, Google unveiled a way to show text-based ads across the bottom of videos supplied by its YouTube subsidiary and also began distributing ads within "widgets" -- the interactive capsules that are becoming Internet staples.
In a sign of its ambitious expansion plans, Google added another 2,130 employees in the third quarter -- more than in any three-month period in its history. Management said the summer additions included about 1,000 hires right out of college and 300 employees inherited in its $625 million acquisition of e-mail specialist Postini Inc.
Schmidt assured analysts that Google was closely monitoring the size of its work force and indicated the hiring would be more modest in the current quarter.
As of Sept. 30, the company's payroll totaled 15,916 people, including hundreds who have become millionaires.
First Published October 19, 2007 12:27 pm