Why Google Is 'Still a Growth Story'

The search giant's Android has passed Apple's iPhone market share in smartphone operating systems.
The search giant's Android has passed Apple's iPhone market share in smartphone operating systems.

Web titan Google (GOOG) hasn't been feeling so lucky in 2010.

The company's share price is down almost 16% since the start of the year, and the weakness can be traced to three main areas: concern over Google's spat with China, worries that U.S. growth may be slowing and uncertainty over regulatory scrutiny from the U.S. to Europe.

But don't be fooled. Despite these headaches, Google appears poised to be a big beneficiary of the rebounding U.S. economy, as advertising picks up and marketers continue the inexorable shift of ad dollars from print media to the Internet.

Throw in the remarkable growth of the company's Android mobile operating system -- which has now surpassed Apple's (AAPL) iPhone platform, according to a stunning report out Monday -- and Google looks set to turn on the afterburners for the rest of the year.

"Conservative" Estimates

On Monday, even before the Android report came out, UBS analysts Brian J. Pitz and Brian P. Fitzgerald issued a bullish report on Google saying it's "still a growth story" and predicting that "long-term estimates could prove conservative." In the report, the analysts addressed concerns that Google's U.S. growth may be slowing -- and found them unwarranted. The analysts reiterated their $700 price target on Google -- which is currently trading at $518 -- and said their target may indeed be low.

"A key concern for several investors has been the perception of slowing growth in the U.S.," Pitz and Fitzgerald wrote. "We ran six top-down scenarios to test our long-term growth assumptions on Google, which show our baseline estimates are likely conservative." They added that their tests suggest "upside potential of$25-$253"on top of their $700 price target."

Pitz and Fitzgerald said the basis for the bullishness "arises from the continued closing of the gap" between online ad spending and total online media consumption. In other words, Google will benefit as users consume more media online and marketers shift more ad dollars from print to the Web.

Google shares jumped 5.8% Monday to $521.65, exceeding the overall market rebound after last week's carnage.

Android Booming

The analysts also observed that Google is "building a strong position in mobile, particularly in search, through its Android OS," a development confirmed by Monday's NPD Group report showing that Android has overtaken Apple's iPhone to become the number two smartphone platform after Research in Motion's (RIMM) BlackBerry.

"When looking at users' propensity to search, over 55% of Android users used search via their phone, the highest of any smartphone operating system," Pitz and Fitgerald noted.

NPD's data clearly show that Android's growth is coming at the expense of the BlackBerry, iPhone and Windows-based smartphones.

Subject to Growing Scrutiny

Despite the rosy UBS outlook for Google, there's no doubt that regulatory uncertainty continues to hang over the company. Google's controversial book-search deal -- which has led to stiff opposition from some authors and publishers -- still awaits approval from a federal judge, after the Dept. of Justice raised antitrust concerns.

Meanwhile, Google's $750 million purchase of mobile ad company AdMob hangs in the balance amid strong indications that the Federal Trade Commission is scrutinizing the pact. Investigators there are apparently intent on preventing Google from amassing a market advantage in mobile ads akin to the powerful lead it has achieved in traditional Web search, with between 60% and 70% of the market, depending on whose numbers you use.

In Europe, Google is facing strong regulatory and legal scrutiny as well. Earlier this year, an Italian judge found three high-ranking Google executives guilty of privacy violations in the case of a 2006 video the company hosted that depicted a child with Down Syndrome being bullied. Google has said it will appeal that case. Google is also facing EU antitrust scrutiny after three European companies lodged complaints over the company's Web-search ranking practices.

The growing regulatory scrutiny of Google is to be expected: The company has become the dominant player in Web advertising and is hungrily eyeing new markets. But based on the fundamentals, Google is in great shape, and the company's shares look cheap. As the U.S. economy rebounds and Web advertising returns, Google is poised for a strong performance in the second half of the year.