Investors Take Heart, Google Has Good Roads for Growth

If the past month has been a bad one for the stock market, it's been especially hard on Google (GOOG). The company that bestrides the world of online advertising like a colossus saw its stock drop below $465 a share Friday, marking a 22% decline since the company reported its first-quarter earnings on April 15. By contrast, the Nasdaq Composite is down only 12% in the same period.

Why the bearishness? Online advertising, which Google's search ads dominate, is a bright spot not just in the beleaguered, upended media industry but in the overall economy as well. Analysts, as DailyFinance's Sam Gustin recently pointed out, still see the stock as a growth story. Google is trading at 21 times its trailing 12-month earnings and at 15 times its estimated 2011 earnings -- not bad for a company that's seeing annual revenue and profit growth of around 20%.

Google did take a rather serious hit to its public image when it admitted that it "screwed up" by collecting -- inadvertently, it claims -- private information from WiFi networks tracked by vehicles scanning neighborhoods for its Street View map service. This is a pretty serious breach of privacy at a time when people are getting jittery about the data companies collect and share about them.

But from an investment standpoint, the controversy isn't likely to hurt its financial outlook. Google copped to the problem quickly, and vowed to fix it. There's no evidence that personal data involved was shared with other companies. Regulators in the U.S. and Europe are growling loudly, which will surely create headaches for the company's attorneys and lobbyists. But it's hard seeing any outcome that could dampen future revenue growth.

Bringing Comfort to Investors

More telling is what happened yesterday at Google's annual I/O conference, where it outlines for developers its strategies and new technologies in a number of areas. And while much of the discussion was of a highly technical nature, involving platforms and markets that may not produce a lot of new business for years, the overall message from the conference is one that should bring comfort to investors bullish on Google's long-term outlook: In several key areas where the Internet is creating new revenue models -- the mobile web, TV convergence, social media -- Google is laying the groundwork to establish a strong foothold, if not eventually a dominant presence.

Let's take these one by one. First, the mobile web. The biggest news here is Froyo, also known as the latest upgrade to Google's Android operating software for mobile phones. This is not simply an upgrade, but a mobile OS that runs two to three times faster than the current version of Android. Unlike the Flash-hostile iPhone, Android works well with Flash and the new HTML5 Web standard. And it now streams music from iTunes or any desktop music library, offering a strong alternative to the central role iTunes plays for Apple (AAPL).

Some tech pundits are declaring it to be superior to what Apple is offering on the iPhone. Mashable says "it makes the iPhone look like a clunky, locked-down piece of junk." jkontherun describes Android as "a runaway 18-wheeler going full speed downhill; there will be no stopping it." Perhaps most telling, Daniel Lyons, the Newsweek writer who moonlights as Fake Steve Jobs, declares that he's ditching his iPhone and going Android.

But Google isn't content with improving Android on smartphones, it's also working with Verizon (VZ) to design a tablet that could rival the iPad in the same way the Droid rivals the iPhone. And it's rolling out another OS, called Chrome, whose browser-centric platform is ideal for powering cheap netbooks. All of these operating systems are avenues to device owners who can be served Google ads. Not all of them will be a huge success. But some will, and that will keep Google's ad revenue growing for some time.

Treating TV Like the Web

Google is also sharpening its weapons to take on the great white whale of advertising: TV. Many commentators are greeting Google TV as a primitive, ungainly attempt to converge the Internet with broadcast and cable TV. Their skepticism is well-founded because convergence has been an elusive dream for at least 15 years.

But Google's approach isn't so much to weave TV and the Web together, but to treat TV as if it were a Web-like platform -- that is, as if developers could create apps that can enhance its experience. This is a practical approach, but nevertheless one that won't offer many rewards for years. But as Eric Schmidt said in an interview with Fox Business, there's a huge market to be created by bringing Google's targeted ads to the TV world.

"Television has not been reinvented in a significant way since the 1960s with the exception of large-screen TVs," Schmidt said in the interview. "Because of processors in TVs, we can run a full Internet browser and have a full Internet experience. And you could never have done this until this year. . . . Because you have a computer there, we know a lot more about what people are doing, and we can do even more relevant television advertising, which should be worth a lot of money."

More Buzz and a Bigger Wave?

Finally, if less significantly, Google continued to fine-tune its most recent initiatives on the social-media front. It's making life easier for developers to tap into feeds of Google Buzz -- its answer to Facebook. And it keeps tinkering with Google Wave, a tool to allow people to remotely collaborate on various projects. Wave is also being rolled into Google Apps.

Google's failure to gain traction in social networks has often been cited by skeptics who argue that the company is a one-trick pony, and that trick is search-based advertising. But its persistence in improving Wave and Buzz has a shot at paying off. Wave could be a tool to connect people in business environments, and Buzz could be an alternative to Facebook, especially now that its shape-shifting privacy policies are scaring away many members.

And besides, if a company has only one trick up its sleeve, targeted online advertising is a pretty good one. The Web is evolving to embrace new platforms like mobile phones and TV. Each one offers a new frontier for targeted ads. And as the Web itself grows more complex, search will continue to play a central role.