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Google is Searching for New Markets

Posted on: Monday, 27 February 2006, 06:00 CST

By Campbell Maclachlan

Since its flotation in August 2004, Google has captured the hearts of investors and internet users alike.

Having initially floated at $85 per share, the shares peaked at $475 earlier this year, valuing the company at $128bn.

However the share price has dipped in recent weeks after fourth- quarter results were poorly received by the market.

Despite reporting an 86% increase in net income for the fourth quarter, to $1.92bn, Google's share price tumbled 20% owing to concerns over increased expenditure and higher taxes. Investors were clearly spooked and $21bn was wiped off the company's market value.

Aside from its recent hiccup, Google's progress has been staggering. Founded in 1998 as a result of a research project by Stanford University graduates Larry Page and Sergey Brin, Google is now the world's largest and best known internet search engine.

Perhaps its greatest achievement has been in distinguishing itself from rivals by refining search results by relevance. Searches are now easier and more efficient, and management were quick to turn its popularity into cash by matching advertisements to search results.

Now Google is keen to broaden its revenue base and reduce its reliance on paid search advertising. Advertising accounts for 99% of revenues, the balance primarily from corporate searches.

A move into classified and branded image advertisements will help, as will the commitment to international expansion. Marketing and sales offices are springing up outside the US and GoogleMail, an email service offering almost inexhaustible capacity, is certainly taking off.

But the company is embroiled in a row with the Chinese government over the validity of their licence, as well as with the US Department of Justice, which this month took Google to court over an alleged failure to supply information under subpoena. The main challenge, however, is the threat from rivals Microsoft and Yahoo! Inc. Microsoft already powers 94% of the world's computers and integrating a search facility into Windows poses a clear threat to Google's position.

Despite these concerns, Google's fundamentals remain strong. Management have been effective in increasing market share in internet advertising and aggressive investment is likely to continue. It remains to be seen whether the pace of growth can be sustained.

Campbell Maclachlan is an assistant director of the Wise Speke division of Brewin Dolphin Securities. The views expressed are not necessarily held throughout the Brewin Dolphin Group. Investments may not always be suitable for all individuals. If you have any doubts about the suitability of an investment, you should consult a professional advisor.

Source: The Journal - Newcastle-upon-Tyne

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