Watching Google's margins

Posted Jul 3rd 2006 11:46AM by Sheldon Liber
Filed under: Earnings Reports, Analyst Reports, Analyst Upgrades and Downgrades, Forecasts, Internet, Blogs, Rants and Raves, Google (GOOG)

How will top line and bottom line growth compare with holding onto their high margins?

No doubt when Google reports their earnings in about two weeks we will find that top line sales growth will be wonderful, but something less than last quarter. However, they have extended their R&D efforts, expanded their offerings to include numerous new features, hired more staff, purchased their company headquarters, increased marketing and legal expenses and made many more advances that at least in the short run generate little or no new appreciable revenue. All of these things are worth while pursuits as they mature as a company. Although if they become a "mature" company too fast their stock price will be hard to sustain.

Their current profit margin is running just under 24%, which is great but this may be hard to maintain in light of greater costs to run the enterprise, to say nothing of having to expense stock options. Their wonderful sky high ROE and ROIC will be affected as well.

Google makes life interesting and also makes the investment world interesting. From the email I have received regarding Google I know there is a lot of emotional money riding on their success. One very bad sign is that a lot of analysts follow the stock and the average rating is a buy. What makes this suspect, besides history, is that this has remained the case regardless of the stocks performance or the companies various initiatives or competition.

We can all be sure that analysts are a latent indicator meaning they try and run in front of the parade after they determine where it is going, much like politicians tracking voter poles. Once they feel they are safe they make their call and claim leadership and financial wisdom. If the stock does not meet expectations it is punished by Wall Street taking out their rath for being made to look bad.

All of you who have been following my blogs know that I feel there are safer places to put your money. Google mangement seems to be doing a very good job. It is the current investor that I question. And by the way, I have heard no news of management buying shares recently.

Disclosure: I have no position in Google--long or short.

Tags: analysts, GOOG, Google, Interesting Investments, InterestingInvestments