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Gloom gathers ahead of Google results

The Net search giant on deck to report Thursday; apprehension soars as Google's stock sinks.

By Scott Moritz, writer
October 16, 2008: 4:51 AM ET

NEW YORK (Fortune) -- Google is set to report third-quarter earnings after the market closes Thursday, and investors aren't exactly placing bets on a big blowout. Despite a huge jump in September Internet searches related to the election and the widening credit crisis, the boost in traffic may not necessarily mean it's all good for Google.

It's been a tough year for the Net giant. Its shares have fallen by half since January as advertising spending cools amid a dismal economic climate. And while Google (GOOG, Fortune 500) has solidified its position as the dominant search site, its business is unavoidably pulled down by the outgoing tide in consumer and advertiser spending.

The search industry saw third-quarter queries grow 21.7% over the year-ago levels, with Google outpacing the field at a 35% growth clip, according to comScore data analyzed by Barclays' analyst Doug Anmuth. The latest month-to-month market share tally shows Google down less than a percentage point from August at 62.4%. No.2 rival Yahoo (YHOO, Fortune 500) was at 20%, according to the comScore numbers.

But American Technology Research analyst Rob Sanderson tells investors to brace themselves for a bit of a disappointment Thursday as Google delivers its results for the quarter.

"While we expect a slight shortfall, we anticipate the report will be better than feared," Sanderson writes in a Google preview note Wednesday. "The paid search model is proving to be very resilient in the face of macroeconomic headwinds, but does remain susceptible to the slow-down in overall ad spending," Sanderson writes.

Google is expected to post adjusted third-quarter earnings of $4.80 a share, up from $3.91 in the year-ago period. Analysts expect sales to be $4.05 billion, a 35% increase from last year's third-quarter level of $3.01 billion.

Looking ahead to the fourth quarter, analysts predict Google will see adjusted profit grow 8% sequentially to $5.19 a share. And consensus sales estimates call for a sequential increase of 9% to $4.42 billion.

Jeff Lindsay of Sanford Bernstein takes a cautiously optimistic view on Google's prospects. As solid as Google has been, there are three areas where "the current macro environment will have some effect," Lindsay writes in his report. One area is paid search, where conversions from searchers to buyers will fall and advertisers will feel the pinch. The second area is lower budgets amid pricing competition from TV, print and radio advertising. And third, Google's AdSense network continues to be weak.

With these factors in mind, Lindsay cut his 2009 sales growth target for Google to 23% from 30%.

As revenue slows, however, some see signs that Google is trying to dampen the impact by containing costs.

Google reduced its hiring effort in the second quarter adding 448 net new employees, about half the number the company hired in the December quarter and a mere fraction of the 2,100 people who signed on in the third quarter of 2007.

Google may claim it can't feel the pressure of the credit crisis drama on the other coast, but the hiring slowdown suggests otherwise. To top of page

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