March 18, 2007 6:32 pm

Google expansion leads to impatience

Wall Street seems to be losing patience with how long Google 2.0 is taking to build – and how expensive the project is turning out to be.

Beset by copyright challenges as it pushes deeper into the media business, and facing big investments in a range of ambitious new products that have yet to show results, Google’s shares have run into the doldrums.

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After dropping another 2.7 per cent last week, the shares have lost 12 per cent since the end of January. Once Wall Street’s hottest stock, Google is once again underperforming the wider market index and the shares are back at a level they first crossed at the start of last year.

According to Wall Street analysts, the prolonged lag reflects concerns about Google’s attempts to expand beyond its core search- engine business. That is despite the continued rapid growth of search, which has met or beaten most expectations.

Viacom’s $1bn copyright lawsuit against Google and its YouTube subsidiary last week was the latest reminder that Google’s push into new businesses could meet resistance and take time to pay off.

Jordan Rohan, internet analyst at RBC Capital Markets, said it would probably take longer than many expected for Google to develop its “act two” in traditional media but it would probably be successful ultimately. Mark Mahaney, internet analyst at Citigroup, said it was too soon to judge whether big investments in new advertising markets would pay off but Google had not “positively surprised” so far.

Besides recent experiments in radio, television and print advertising, Google has built a number of expensive new online services, such as its payments system, that have yet to show results.

But Mr Mahaney said that some, such as Gmail, news and a finance information service, had attracted considerable traffic and helped to feed its search advertising system.

The pause in Google’s stock price at a time when earnings from its core search business have been climbing fast, has left its shares more attractively valued than at any time since its initial public offering in 2004.

At about 30 times this year’s expected earnings – or 45 times trailing earnings – the shares are close to the 25 times multiple of Ebay, whose business has mat-ured far more than Google’s.

Analysts said the end of Google’s strong share price run also concluded the first heady phase of its growth, and could start to affect how employees viewed the company. “The extraordinary amount of wealth transferred to Google employees will not happen again,” Mr Rohan said. Despite that, Google’s reputation as a good place to work meant it would probably continue to attract top talent in Silicon Valley.

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