2 Major Reasons Why Google Bears Were Wrong This Quarter

Google (GOOG) shares are soaring 60 points in after-hours trading after the company beat estimates on both the top and bottom lines, so I figured I would weigh in briefly. Bears on the stock have been insisting that the weak domestic economy was going to severely impact Google's results, but this view ignored two very important points.

First, Google's core market (online advertising) is not completely dependent on the economy. If the online ad market was mature already, then the bears would have been right. However, online advertising is still growing very quickly as a percentage of the overall advertising market. As a result, lower overall ad spending can actually occur simultaneously with growing online advertising, which is what Google is benefiting from. When you are taking market share, as Google is, those gains can offset much of the decline in corporate discretionary spending.

Second, Google gets 51% of its revenue from overseas. This helps the company in two ways; exposure to growing international markets, coupled with currency gains due to the weak dollar. In fact, we just saw great first quarter numbers from IBM (IBM), due in part to its very strong presence overseas.

Now, I am not saying Google is completely immune to a slowdown in the United States, that would be naive. However, when you get half of your sales outside the United States and you are taking market share domestically as well, the impact from a weak U.S. economy is not as dramatic as many would have you believe. And this is not only a Google phenomenon, it is a factor behind many of the strong earnings reports we have seen so far this quarter. Investors should keep these things in mind.

Full Disclosure: Long shares of Google at the time of writing.

Comments

[e chang:]

If you have written this article two days ago, it would have been impressive.

2008 Apr 18 08:16 AM

[101010:]

e chang has it right. Chad has predicted the results of a coin flip two days after the coin hit the floor. And even so, he hedges his conclusions in the last paragraph with his noncommital "investors should keep these things in mind" statement. Investors should also look elsewhere for contributors who will cite evidence boldly make predictions about what will happen, rather than boldly stating what happened and why.

But hey, he got his article published in seekingalpha. Yippee.

2008 Apr 19 01:15 AM

[adan:]

and the corollary to the points about overseas profits holding up not only google but many of the other better reporting companies is that, if / when, the de-coupling turns out to be a lag-coupling, the profits of all the above positive-impacted companies will be hit two fold down, from the us market, and from overseas

when? who knows, but worth watching, at least for me

2008 Apr 19 10:05 AM

[mavericks:]

He put his $ where his mouth is if he was long going into earnings. At least he provided disclosure which is more than what most Seeking Alpha articles provide.

2008 Apr 19 12:29 PM

[seattleite:]

I hate these " i told you" comments. Why didnt you write this before the results.

2008 Apr 20 12:24 PM

[discov:]

His points should still be relevant for the MSFT report that is coming up. It's a similar situation. So use the article instead of getting worked up about it.

Ryan

2008 Apr 21 02:41 AM