Google Can't Afford Twitter: No Longer a Growth Stock

Rumors that search giant Google (GOOG) was interested in purchasing the skeletal social networking site Twitter were quickly corrected by both companies, who are now indicating that a partnership is in the works. Much of the commentary surrounding a Google-Twitter partnership focuses on the breathtaking rise of the latter, which has gone from zero to a purported billion dollar plus valuation in under two years.

The bigger question though is why Google is not attempting to buy Twitter outright. Product-wise, Twitter is a perfect fit for the Mountain View, CA behemoths: user friendly, focused at gathering large amounts of data from users, and it has a huge potential targeted-ad platform.

A glace at Google’s income statement may help to explain why there’s no outright offer on the table. Google’s gross profit grew by pretty much the same rate last year as it did in 2007: 50%. That’s impressive for a company with a market cap of around $120 billion. But Google’s net income is a different story. In 2008, Google made $4.2 billion, or 0.5% more than it did the previous year. That growth is tiny compared to the 37% growth in net profits Google showed year-on-year in 2007.

The reason for the huge deceleration in the company’s net earnings growth seems to be that Google has taken on more projects than it can handle in order to sustain its previous growth rate. Coupled with a big recessionary environment (which is tough when you’re trying to flog ads), and that hits operating income hard. Indeed, while growth in operating costs at Google shrunk by around 20% last year, at $5.5 billion growth in operating income was just 10%, compared to 40% in 2007.

When you’re experiencing that kind of pressure on the middle line, every billion counts. In other words, Google can’t afford to buy Twitter without severely impacting its quarterly and annual statements. It’s an age-old public company dilemma: humongous previous growth rates begin to limit current possibilities for expansion, no matter how fiscally responsible you are. The danger with a situation such as the current one is that a competitor with less compatible infrastructure, but with more cashflow mobility, swoops in and buys up the target. Hence Google’s race to reach a content sharing agreement: to nudge out the potential of a Microsoft (MSFT) or Yahoo! (YHOO) acquisition.

If there was ever any question of whether Google had fully hatched out of its “growth stock” status, here’s the proof that it has.

Disclosure: no positions