Google's Gains Not Great Enough for Wall Street

More and more, Google these days behaves like a standard corporation. Its growth model is less organic, and more driven by mergers and acquisitions - especially its recent effort to acquire online display advertising provider DoubleClick. And rather than growing by disproportionate amounts, Google's growth rate is falling more in line with reality...which is disappointing investors who had preferred the virtual fantasies of instant capital that it had once been known for.

Which is why a company with 57.6% greater quarterly revenue than for the prior year's second quarter, and 28.2% greater profit on that revenue - after accounting for the costs of acquisitions - managed to disappoint Wall Street today, closing down 5.2% on the NASDAQ exchange to $520.12 per share.

Here's what analysts were noticing: Google's expenses from operations rose for the quarter just ended by about 68.7% over the year ago quarter. Operating expenses account for 3% more of revenues this last quarter than in the previous quarter (Q1 2007).

So costs are rising faster than profits. But that should not have surprised anyone either, especially when you take a look at the balance sheet to see how the company is compensating for rising costs: Despite the appearance of converting itself into an acquisitions-based company like Cisco, Google actually invested 59% less in other companies' securities during the first six months of this year than for the same half of 2006 - $7.3 billion this half versus $17.6 billion. So the company is compensating for how it spends money for tangible assets by paring its expenditure in marketable securities.

But from a financial analyst's perspective, that means Google is transitioning from a "growth" company to an "income" company, which impacts which mutual funds invest in it, how much, and for what reasons. As this transition proceeds, Google's image may change from representing the last great resurgent Internet operation, to a bell-weather, reliable investment like IBM during the 1970s and early '80s.

Late today, MarketWatch reported that even disappointed analysts are maintaining their price targets for Google of as high as $700 per share. With over 311.5 million shares outstanding, that would give Google a market cap value, perhaps before the end of the year, of over $218 billion.