Google to Deliver Strong Results Despite China Worries

Are Google (GOOG) investors feeling lucky?

That's the big question heading into the search juggernaut's first-quarter earnings announcement Thursday, as investors seek further evidence that the U.S. economy continues to rebound. Because the Mountain View, Calif. company derives virtually all of its revenue from Internet ads, Google's announcement will also indicate whether Web advertising is beginning to pick up after a prolonged slump.

Fact is, Google is called the "Mountain View money-machine" for a reason: the company's incredibly profitable Internet advertising business. Google fared comparatively well during the recession, and now that the economy is starting to heat up, investors should expect a 20% boost in quarterly revenue, compared to 17% last quarter, according to Michael Liedtke at the Associated Press.

The dynamic UBS analyst duo of Brian J. Pitz and Brian P. Fitzgerald issued a note saying they remain "bullish" on Google "as our checks suggest e-commerce (and search as a derivative play) continues to benefit from a strengthening US consumer."

"We expect Google to post solid first quarter results on the back of improving pricing and strong paid click growth," the analysts wrote.

China, Regulatory Probes Weigh on Google

But it's not all groovy in Google-ville. Investors remain concerned about the company's dispute with China and well as increasing scrutiny of several aspects of Google's business by regulators in the U.S. and Europe.


The Chinese situation is dramatic -- Google picked a fight the government of the world's largest Internet-using nation -- but in the short term, the impact in Google's earnings will be minimal because China represents a tiny fraction of the company's sales.

Still, concerns over the long-term implications of Google's China spat have irked investors somewhat, which is why Google's stock has underperformed some of its peers since its January threat to stop abiding by Chinese censorship rules. Last month, after China refused to back down, Google made good on that threat by redirecting its China-based search engine to Hong Kong. As a result, its relationship with the Chinese government has become toxic.

Meanwhile, Google faces regulatory scrutiny both in Europe and the U.S. over a several aspects of its business, from its Web search rankings to its book-scanning initiative to its $750 million purchase of AdMob. All of this highlights a consequence of Google's success: the bigger the company gets and the more it seeks to enter new markets, the more it will attract the attention of regulators. As Google itself discloses, government scrutiny is a risk for the company moving forward.

Betting on Mobile and Cloud Computing

Despite Google's cash-gushing business model, there is unease about the fact that Google's overall revenue growth has slowed considerably since its mind-boggling ascendance after its IPO in 2004. Slowing revenue growth in a market it already dominates -- Web search -- has led the company to look for new sources of revenue.

After all, Google derives over 95% of its revenue from Web ads of one form or another.

One area where the company is making an aggressive push is in the mobile space -- and the company's Android mobile operating system has gone from a near-standing start to almost 10% market share, thanks in large part to an aggressive push by Verizon Wireless. For its mobile efforts, Google's been rewarded with an increasingly bitter feud with Apple, which makes the wildly popular iPhone.

Another area where the company is making a serious push is in the business software space. Google's enterprise services offer companies the full range of productivity tools -- word processing, spreadsheets, presentation software -- with the ease of "cloud computing," in which data is stored on remote, Google-owned servers.

Questions About Security Remain

Questions remain about the security and reliability of cloud computing, but Google's offering was good enough for the City of Los Angeles to adopt the company's cloud-based email product. Google's share of the enterprise market remains tiny -- suggesting massive upside potential if the company can convince other big municipalities and corporations to use its services.

Analysts will be interested to hear updates on China, regulatory scrutiny -- particularly of the AdMob deal -- the enterprise business and the mobile business. But they won't be hearing those updates from Google CEO Eric Schmidt, who, for the first time since the company went public in 2004, is not expected to participate on the earnings call.