Two articles re Google/GOOG

For Google Shareholders, A Party Just Like It's 1999
Investors Business Daily
BY PETE BARLAS

Google/GOOG stock is acting like it's 1999 — and that's because its balance sheet is acting nothing like 1999.

Shares in the No. 1 search engine jumped 5.7% on Friday, a down day for the market in general, to end at an all-time closing high of 215.81. It went public in August at $85.

The hike marked the first trading day after Google late Thursday reported sales and profit figures for its first quarter that far exceeded even the most optimistic estimates.

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While one-day stock gains of 5%, 7%, 10% or more were not unusual during the dot-boom, profits and huge profit growth most decidedly were. But Google reported a net profit of $1.29 a share, up nearly six times from the 24 cents it reported in first-quarter 2004. Revenue rose 93% to more than $1.2 billion. The company gets some 95% of its revenue from the sale of ads placed on targeted search results pages, a fast-emerging method of advertising used by more and more companies.

And analysts see no end in immediate sight.

Google is an Internet boom unto itself, says Mark Mahaney, an analyst for American Technology Research. "The fact is, of all Internet companies, Google right now has the best fundamentals," he said. "They have the strongest revenue growth, the highest profit margins."

Indeed, no other tech company with quarterly sales of more than $500 million enjoyed a 90% sales hike in its most recent quarter.

Scott Kessler, Internet analyst for Standard & Poor's, upped his target price on Google shares to 300 from 260 after the latest earnings report. "The company is just knocking the cover off the ball," he said. "It's just mind-boggling."

Six years ago, most Internet companies were happy with mild revenue growth, as they continued to log quarters in the red. The Internet of yesteryear was mostly hype and false promises, says Troy Mastin, an analyst for investment bank William Blair & Co. "Back then valuations were based upon eyeballs (gains in Web site visitors) or press releases," he said. "A meaningless press release would come out and the stock would shoot up 40 bucks in a day."

Google's success stems from developing secret sauce software algorithms that provide what many observers say are the most concise and relevant search results on the Web. Handling more than 2 million U.S. search queries in March alone, Google has more than twice the market share of its two closest rivals, Yahoo (YHOO) and Microsoft's (MSFT) MSN, says tracker Nielsen/NetRatings. Yahoo also has paid search. On Tuesday it, too, reported numbers that handily beat analyst expectations for its first quarter.

More advertisers are jumping online, where paid search links their ads with generally good sales prospects, says Mastin. "The fundamentals that are driving the business are real companies and real customers," he said. "They are buying (the service) because it works, not for any other reason."

Most of Google's success has come from selling to midsize and small advertisers, electronically. "The joke was that if you didn't do at least $10,000 a month in ads, you never talked to Google personally," said Martin Pyykkonen, analyst for investment bank Janco Partners. "You just dealt with the Web site." That keeps costs down.

In paid search, often advertisers bid to place their ads with the results of specific keywords or phrases. The bid typically is a set amount of money for each time a Web surfer actually clicks on an ad. Advertisers that pay the most, say $1 or $10 per click, get the best placement on a search results page.

Google, like Yahoo and others, is working on plans to reach more large advertisers. Most of the biggest companies have not advertised online, Google Chief Executive Eric Schmidt said Thursday during the earnings conference call. "It's become clear that that is a vastly underpenetrated space," he said.

Google has challenges. Yahoo and Microsoft loom large. The ad market could repeat its nose dive of four years ago. And analysts could place such high expectations — Google is the rare public company that does not provide sales and/or earnings guidance — that it will be easy for future Google quarters to disappoint. "One or more of those factors probably will be a source of a disappointment," Kessler said. "When? Heck if I know."

For now, advertiser demand will keep driving Google, says David Garrity, analyst for Caris & Co. "The evidence is pretty clear that you have got traditional advertisers stepping up, and that's something that is likely to continue over the course of 2005," he said. "If there's an end to it, I can't see it from here."
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Living by Google Rules

By Steven Levy
NEWSWEEK/Senior Editor

Mining the Web is only part of it. The search giant faces growing pains and fierce competition.

April 11 issue - A couple of weeks ago, a prominent dot-com warrior gave me a hot tip about Google: the next big move of the search phenom would be an assault on eBay. Think about it. Millions visit the Google site daily; why not let them search for items offered by sellers? The company already knows auctions, since it uses a bidding process for ads that accompany its search results. And eBay might be vulnerable, since it recently angered its sellers by raising commissions. The move would be straight out of the "Art of War" playbook apparently distributed by venture capitalists to all ambitious entrepreneurs.

But when I floated this theory to Google's CEO, Eric Schmidt, the Valley veteran who joined the company in 2001, he just laughed. "It's a perfectly reasonable question, but it doesn't compute here," he says. "If I said at a meeting, 'Are we going to enter eBay's space?' everyone would look at me and say, 'Why? They do a fine job.' The genius of Google is that we find new ways to solve problems that were never solved before."

Welcome to Google-think, the mind-set by which Sergey Brin and Larry Page, the brainy Stanford dudes who founded the company in 1998, hope to change our world while incidentally redefining the way corporations should be run. We've learned the mission of the company: to make all the world's information readily available to everybody. But in the past year we've begun to see the quirky management style by which this might be accomplished. The founders first outlined their views in a colloquial "owner's manual" included in the prospectus for the initial public offering that would make Brin and Page multibillionaires. It warned shareholders that Google would not be overly concerned with quarterly results, but focused on the long term. It stated that while Google actively sought profits, it also believed in higher principles, notably the Google version of the Boy Scout Pledge, "Don't be evil."

The IPO, run by an unconventional auction process and plagued by embarrassments like an untimely Playboy interview that piqued the SEC, was somewhat of an ordeal. The company took a battering in the press, and the final price to bidders for the opening stock was $85 a share, much less than the $108-to-$135 range originally sought. On the day Google went public, while Page and Schmidt went to NASDAQ to ring the opening bell, Brin came to work as usual. "I was tired; I didn't want to take a red-eye. It was a very productive day." In fact, that day kicked off a period of intense productivity, with Google introducing a slew of new features and improvements including desktop search, a mapping product and a scheme to put the entire contents of five major libraries online.

"The IPO was work and, yeah, it was a distraction," says Brin. "But now that it's over with I actually see us executing really well."

"I would disagree a little with that," Page says. "I actually think we executed well during that whole time. We always crossed our fingers that we'd be able to continue to operate in the way we wanted to as a public company, and I think that's been largely true."

Certainly by the numbers, Google's results have been awesome. In the last quarter, the company took in more than a billion dollars, twice as much as the previous year. Profits more than tripled. "They haven't missed a quarter," says John Battelle, author of the upcoming book "The Search." And the share price? About $180. All this while sticking to the promise that the company won't kowtow to Wall Street's demands for financial guidance on a quarterly basis. Indeed, when Google hosted a daylong analysts' briefing in February, the chief financial officer, usually the star of such confabs, spoke for less than four minutes, with literally no comment on the numbers.

But Google-think is under big-time pressure, as the company tries to handle dramatic growth—from under 10 employees to more than 3,000 in just a few years—and much tougher competition. Yahoo has undertaken a massive attempt to rebuild its search efforts, and is in a position to lead in the next step in search—personalization, where the search engine gets better results because it knows what you like. "We can leverage our base of 165 million users," says VP Jeff Weiner. Microsoft, on a mandate from Bill Gates to overtake the Google guys, has also launched a huge effort, backed by a $150 million ad campaign. "In 10 years from now, what you see in search today will be like looking at an eight-track tape," says MSN's Bob Visse. And last month the lagging but technology-rich contender Ask Jeeves became revitalized when Barry Diller added it to his Internet portfolio. "The 44 million visitors [to his sites like Expedia and LendingTree] will help Ask Jeeves," says Diller.

The Google-chasers take heart in recent surveys, which indicate that competitors are catching up both in technology and in market share. "A couple of years ago we were talking of Google and only Google, but that's changed," says Danny Sullivan of Search Engine Watch.

All this has led some critics to wonder whether Google's let-'em-loose theory of planning can withstand these challenges. Google's execs say the critics just don't get it. "Let me tell you why we look so scattered," says head of Web products Marissa Mayer. She draws a big circle on a whiteboard, with a bunch of smaller circles around it. Outside those orbits, she makes a few X's. "We operate on a model of 70-20-10." (This is a formula concocted by mathematician Brin.) The big circle represents the 70 percent of effort Google puts into its core business: Web search and the targeted ads that accompany the results. Included in that category are the things deeply integrated into search, like Google News. The loops outside are search-related products like Gmail (which displays the targeted ads Google sells). (Some of those are the results of Google's policy of letting its engineers use one fifth of their time to work on projects of their own choosing.) The X's are less-integral products like the Weblog tool Blogger, the Picasa photo organizer and Keyhole, a 2004 Google acquisition that uses satellite imagery to provide photographic maps.

While the discrete new products outside the core get attention, Mayer says that the bulk of Google's work is quietly improving the bread-and-butter of search. "We don't put out a press release saying that we got rid of 5 percent of search spam, but that stuff happens all the time. We definitely have a grand plan," she says. Indeed, just this week Google is integrating the Keyhole service into its local search product.

Nonetheless, the evolutionary process by which such products rise and sometimes fall underlines the fact that Google is sort of scattered—by design. "Larry and Sergey's vision, which I think is absolutely brilliant, is, 'Let's get these systems to prove themselves.' It's very Darwinian," says Schmidt. In order to let the products develop organically, sometimes Google forgoes revenues in the short term. "It takes years to become profitable in terms of total dollars invested, but we don't even think about it," he adds. "When we started Google News, we forgot to put ads in it. It's not deliberate. We actually forgot."

If your takeaway from that story is that Google is sloppily leaving money on the table, don't bother applying to work there. Page and Brin both believe that moving forward, fast, will work better in the long run. "With Larry, it's all about big impact," says Google exec Sukhinder Singh.

This year it will be Brin's turn to write the shareholder letter. He's focusing on things like new compensation plans to keep employees motivated now that the IPO is over. (He's already announced a "Founders' Award," with grants that can total more than $1 million to star performers.) "This one's less interesting," he says. "There's not going to be anything terribly shocking in it."

"Well, one thing," Page prompts him. "There's a certain amount of ... humor." Brin smiles. "Maybe I made it a little more entertaining." But no matter how outrageous his quips may be, they won't be half as entertaining as Google's larger quest to remake search—and business—by its own rules.