It has taken Wall Street a long time to warm to Google’s second act.
This week, however, stock market investors have finally thrown aside some of their wariness. By pushing the search company’s shares to their first record high in almost five years, they delivered a vote of confidence in the new, more diversified advertising business that has become the basis for Google’s latest surge of growth – while also giving an implicit thumbs-down to Facebook, whose short-term chances of putting Google in the shade, at least in business terms, have receded sharply.
That the stock market reassessment coincided with the launch of Apple’s latest iPhone – a device that has been stripped of Google’s YouTube and maps services – made the vindication all the sweeter.
It took a change in market sentiment, rather than any material change in circumstances, to lift Google’s shares back above the level first touched in November 2007. After falling to a low of $262 during the financial crisis, they topped $750 this week, putting the company’s stock market value once again close to that of old rival Microsoft.
Brian Wieser, an analyst at Pivotal Research, says there’s "nothing fundamentally different” in Google’s prospects compared with the recent drawn-out period in which its shares remained stubbornly bound between $500 and $650. The shares, he adds, were slow to respond to a shift now well under way: "They’ve been able to use the cash from paid search to invest in display.”
Alongside the move into online display advertising, which could account for more than 10 per cent of revenues this year, a second transformation has been changing the face of Google’s advertising, this time in search.
For much of the past year, Wall Street has looked on this with concern. A swing towards mobile, where adverts are sold for far less than on personal computers, has dragged down the average pricing in Google’s core search business, with the company’s overall cost-per-click declining in each of the last three quarters.
Some of these fears have started to dissipate. Most searches on smartphones are complementary to rather than replacing those on PCs, while the 70 per cent pricing discount they used to attract has fallen to around 50 per cent, according to Mark Mahaney, an analyst at Citigroup.
Larger mobile screens have also helped. "More and more people are searching for things on their tablets: Google wins,” said Anthony DiClemente, internet analyst at Barclays, who estimates that these search adverts yield as much as 75-90 per cent of those on PCs.
Search advertising could now be set for a further boost in the coming months as Google launches a new product listing service, which lets advertisers display far more information about goods for sale.
That Wall Street’s new-found appreciation of Google’s charms has followed closely on Facebook’s disastrous initial public offering hardly seems coincidental. The problems some other internet companies have had in making money from mobile have led investors to shift their money into Google instead, said DiClemente, though he did not single out Facebook by name.
At Facebook’s IPO in May, the social network’s market value of $104 billion was slightly more than half that of Google, even though the search company is expected to notch up 10 times as much gross revenue this year.
It didn’t take Wall Street long to reconsider this initial judgment. Google is now worth more than four times as much as Facebook – a gap that could grow further, according to some analysts, given that Google’s shares are trading at only around 15 times its expected 2013 earnings, compared with a multiple of 32 times for Facebook.
That implicit discount on Google’s shares points to a lingering distrust that Wall Street has not yet been able to shake off, despite expectations that revenue will grow next year by more than a quarter to $54 billion and net profits by nearly a fifth to $14 billion.
With control firmly in the hands of the founders and a stubborn refusal to disclose as much as investors would like, concerns about governance and transparency continue to dog the company.
A lack of transparency, in particular, has made it hard to tell just how well Google has been managing the underlying transition in its advertising business. As Wieser says of its dominance of online video: "YouTube is certainly capturing a rising share of the budgets going to the web – what we don’t know is if it’s a profitable one.”
With US and European regulators moving into the final stages of parallel antitrust investigations, regulatory concerns are also looming large. Rivals who argued that Google should never have been allowed to use the cash flow from search to fund market-leading positions in display and mobile advertising have not missed the chance to turn its success against it.
"Google’s sky-high profits come at the expense of every small business on the internet that pays a hidden tax in higher online advertising costs that ultimately get passed on to their customers as a result of the search giant’s abuse of its monopoly power,” said FairSearch, a lobby group made up of Google rivals such as Microsoft, Expedia and Oracle.
None of this, however, has been enough to dampen the spirits of the bulls. Summing up Wall Street’s grudging acceptance, Wieser says: "There are a lot of things not to like, but they keep spitting out cash.”
Copyright the Financial Times 2012.
Richard Waters Financial Times