Analysts: Google investors "freaking out for nothing"

July 17, 2008: 7:57 PM ET

By Yi-Wyn Yen

As far as second quarters go, Google had a decent one. But that minor detail got lost in the big tech news Wednesday as jumpy investors punished Google in after-hour trading by as much as 11% for missing Wall Street estimates.

Google (GOOG) reported net profits of $1.25 billion, or $3.92 per share for the second quarter. Excluding stock-option costs, Google came in at $4.63 per share. The Street had expected $4.74, according to a Thomson Financial survey.

Despite Google's shares tumbling below $500 for the first time since the company reported its last earnings, analysts insist shareholders shouldn't worry. "There's more positive here than negative," said Youssef Squali, an Internet analyst with Jefferies & Co. "People are freaking out for nothing."

Google's gross revenue climbed 39% from a year prior to $5.37 billion and its hiring declined 10.3% from the same period, a sign that Google is controlling its spending. Investors spooked by earnings news from big tech companies like Microsoft (MSFT) and IBM (IBM) were swift to punish Google too.

"Google had a good second quarter performance," said Bernstein Research analyst Jeffrey Lindsay. "But anything other than a definitive knock the ball out of the park is open to criticism."

Analysts say most of Google's miss came from lower interest income and higher overhead costs. Google generated $90 million less from its large cash pile than in the first quarter because it had to pay for DoubleClick, its $3.1 billion acquisition.

Google CFO George Reyes says the company spent $475 million, or 48% more than it did last year for the same period, to pay for "legal fees and professional outsourcing" costs on consultants. Google is dealing with a copyright lawsuit from Viacom (VIA) over its YouTube video-sharing site. It is also participating in congressional hearings to discuss its ad partnership with Yahoo (YHOO).

Despite the solid quarter, Google CEO Eric Schmidt had chief economist Hal Varian on the earnings call to reassure nervous shareholders. Varian gave a brief economics lesson on why Google is recession-resistant. "As times get a little uncertain, price sensitive consumers spend more time searching for deals. We have a bit of the Wal-Mart effect," Varian explained. "They are doing more shopping online and watching their dollars."

Certainly, Google is not immune to the economy. But analysts agree with Varian that Google is better positioned to weather a weak economy because of the accountability of paid search advertising.

Varian said that other than real estate, every sector showed revenue growth year over year. "Ad spend is up in auto. Auto advertisers are willing to spend on clicks as the weakness is on the consumer side," Varian noted. "During periods of smaller growth, the last thing advertisers want to cut is search-based advertsing."

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