Time to Buy Google?

To the when-it-rains-it-pours category, add a slew of earnings reports from some of the Internet's biggest bellwethers due out the week of January 28. By far, the most interesting will be Google's, on January 31.

The Mountain View, Calif.-based Internet giant is expected to report a strong end to a decent 2007, with revenues up 54% for the fourth quarter vs. the same quarter a year ago and earnings up 40% to $4.44 a share. For the year, analysts predict earnings per share of $15.58, up 61% from 2006, on revenues of $11.7 billion.

Despite the anticipated good news, Google shares fell 1% to close at $550.52 on January 29. Since peaking at $742 on November 6, 2007, Google (symbol GOOG) has lost more than a quarter of its value as worries about the economy translate into uncertainty about the company's online ad revenues.

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Search volume declined about 1% in December from November levels, whereas it was up 12% in the same period last year. "It could be the beginning of a slowdown in consumer searches as consumers pull back on budgets," says analyst Clayton Moran at Stanford Group in Houston, Tex. He recently lowered his opinion on Google from "buy" to "hold."

Most of Moran's peers, however, are hanging positive outlooks on Google's long-term prospects. Besides, say the bulls, Internet advertising is somewhat recession-resistant because it's cheaper to run ads online than in print or on television. And because Google's overseas revenues are on track to surpass U.S. sales this year, an economic slowdown won't hurt as much as it otherwise would, unless the recession turns global.

For now, with 70% to 80% of the market, Google is the undisputed leader in paid search advertising. And with the recent acquisitions of YouTube and DoubleClick (the latter still awaiting -- but expected to win -- regulatory approval) Google is exploring new revenue opportunities in video and banner ads.

Google also is working on a health-care platform, due this year, that will help people maintain their personal medical records, search for health-related information and even find a local doctor. And there is Google's expanding role in non-search applications, including e-mail, word processing and maps.

But the biggest opportunities for Google are in mobile Internet advertising, as more and more cell phone users transform their handsets to browsers-on-the-go. According to Reuters, Google chief executive Eric Schmidt called mobile Web advertising "a huge revolution," speaking at the World Economic Forum in Davos, Switzerland, on January 25. "It's the recreation of the Internet, it's the recreation of the PC story, and it is before us -- and it is very likely it will happen in the next year," Schmidt says.

Google's ultimate role in the mobile Web revolution will become much clearer when the Federal Communications Commission auction for a key spectrum of wireless bandwidth is completed. The super-secret bidding began on January 24 and may not be complete until mid to late February. If a minimum bid of $4.6 billion is reached, the FCC will open the spectrum to allow customers to use any compatible device or service -- not just those peddled by the high bidder.

Google has lobbied hard for the open access and is a bidder in the auction. But it's unknown whether Google is in it to win, or just to push bids to the minimum.

"Bidding to win is a fairly high-risk strategy," says Sanford C. Bernstein analyst Jeffrey Lindsay. The ultimate price could be as high as $10 billion, and Google would then have to commit to spending some $5 billion a year over the next five years to build out the wireless infrastructure, he figures.

The expense would be lower if Google partnered with another wireless player, such as Sprint or T-Mobile. Nonetheless, investors are likely to balk at an announcement that Google is the high bidder for the spectrum, pushing Google shares "significantly below $500" in the short term, Lindsay says.

In five years' time, however, the strategy could lead to Google claiming 20% of the wireless voice and data market -- and that could push the stock to $1,100, he says. A five-year double, amounting to nearly 15% annualized, may not be the kinds of returns Google shareholders are accustomed to, although it's not exactly chopped liver.

What if Google is bidding to ultimately lose? Then the stock takes off at the news, buoyed by the company's strong earnings and bullish long-term prospects, and heads toward Lindsay's 12-month price target of $850, or toward more cautious trajectories in the mid-$700 range.

Either way, Google looks like a buy for investors who share Google's long-term vision, particularly for those patient enough to sit on the sidelines for a while.