Google continues to astound the market

Stan Beer
Sunday, 22 October 2006 18:10

IT Industry - Strategy

Just when it looked like Google's growth curve was flattening, the search leader once again left market watchers in a state of befuddled wonderment, smashing through analyst forecasts for Q3 with stunning results.

Compared with the previous corresponding quarter, Google posted a 70% increase in its revenues of US$2.69 billion and recorded a whopping 92% increase in its net profit of US$733 million.

The good news for Google is that it is rapidly becoming more globalised giving it access to wider markets. The international component of its revenue is growing faster than the domestic US market. Revenues from outside the US were 44% in Q3 compared to 39% Q3 2005.

Those who bought Google stock at or near the float price of US$85 in 2004, while others looked on with smirks on their faces, are now having the last laugh with the shares closing at US$459 on Friday.

If there is one possible chink in Google's armour, it is the company's heavy exposure to one major source of revenue - search. As Ovum analyst David Bradshaw wrote in a research brief: "These results contrast somewhat with Yahoo's results earlier this week, where growth was a 'mere' 19% year-on-year. Yahoo has had some problems competing with Google, not least the delay to its new advertising platform. However, that it now rolling out and it should give Yahoo more of a fighting chance to hold on to market share in a rising market.

"There is a great irony in this comparison, which is that Google's ambition is ultimate to become rather more like Yahoo. Google's management will be acutely aware of the company's dependence on the advertising revenue, with search in particular making up a very large chunk of its revenue. Google's strategic imperative is therefore to diversify its business and grow more revenue streams."

To that end, Google is trying to grow its enterprise licensing business which, as Bradshaw points out, is still small potatoes, and build a desktop applications presence, as demonstrated by its recent Google Documents announcement. Meanwhile, search appears to be where the action is as Yahoo can testify.