Google Earnings Preview: Why Wall Street Is Bullish on Search Giant's Growth

Internet search giant Google (GOOG) hasn't been feeling so lucky in 2010.

So far this year, the company's share price has fallen 20% to under $500 -- substantially worse than the Nasdaq, which is flat for 2010. Now, as the company prepares to report earnings on Thursday, should investors be bullish on Google?

The answer, according to most Wall Street analysts, is a resounding yes. The simple truth is that the Mountain View money-machine is superbly positioned to weather the cloudy economic times ahead, thanks to its dominant spot in search advertising and its growing insurgency in mobile communications via the Android operating system.

If the economy recovers, Google wins. If the economy falters, the company is better positioned than most to thrive during a downturn.

Poised for the Digital Economy

The U.S. economy is changing, and Google is poised to benefit. More Internet users, more smartphone users, more cloud computing mean more money for Google. These are evolving, secular changes -- as opposed to the cyclical, recurring market shifts that affect companies from year to year. Facebook and Twitter are pervasive and hugely influential, but no Internet start-up has been able to conjure a business model as profitable as Google's.

When it comes to expectations, Google is the victim of its own success, as we saw last quarter. It hasn't helped that much of the Google press this year has focused on privacy concerns related to the company's failed "Buzz" product and its controversial Street View Wi-Fi sniffing effort, which represents a nontrivial regulatory overhang.

Google's six-month soap opera with China, which came to a queasy denouement last week, has also generated headlines, but its China business contributes just 2% to its overall revenue, so the financial impact of the imbroglio has been significantly overblown.

Value Investors Take Note

A quick glance at analyst recommendations for Google shows a preponderance of buy, outperform and overweight calls. Most analysts have a price target on the stock in the $600 range and higher. Not only that, but for one of the few times in its history, Google now trades with a price-to-earnings ratio under 20, turning the stock that defied gravity for years into something few would have expected: a value play!

On average, analysts are looking for earnings per share of $6.55 on $5 billion in revenue. Investors should watch closely to see if Google can break $7 per share, which would be a very strong performance.

UBS analysts Brian J. Pitz and Brian P. Fitzgerald see Google heading to $700.

"We believe the stock offers a good opportunity for share outperformance relative to [the second quarter] and 2010 expectations and recent price movements," the analysts wrote in a recent note to clients. "Google's search and mobile products should continue to drive sustained user growth over the next several years."

Core Business is Strong

Remember: For all of its far-flung initiatives, Google derives the overwhelming majority of its revenue from search advertising. As more people get broadband web access and shop online -- and marketers spend more money on Google's highly measurable and targetable Web ads -- the search giant will continue to print money.

"Google offers the best long-term exposure to secular growth trends, including online and broadband user penetration, Mobile Internet, eCommerce/advertising, digitization, and software hosted in the cloud," the UBS analysts wrote.

Some observers have expressed concern that Google growth rate is slowing. But that's completely natural -- there is no way the company could sustain the triple-digit growth rates that characterized its early, meteoric rise. The fact is, slowing growth is a natural consequence of becoming a mature, $120 billion company. In the Internet age, Google's has a bullet-proof business model, and its ability to anticipate digital trends (as it has done so well with Android), bodes will for its future.

Android is Booming

Google's mobile market share jumped from 2.8% last October to 13.0% in May -- a remarkable display given the ferocity of mobile competition and strong offerings from Apple (AAPL) and Research In Motion (RIMM).

Even better for Google is the fact that it is grabbing share of an exploding smartphone market. In the three months ending May, smartphone ownership increased a whopping 8.1% to 49.1 million people.

Google CEO Eric Schmidt has famously predicted that the company would make more money from mobile search than traditional desktop search -- which is why the company spent $750 million on the top mobile advertising company, AdMob.

For investors seeking a long-term Internet play, Google is clearly the best bet in an uncertain time -- and especially at these prices.