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One day Google will have to become a normal company. Before yesterday’s third quarter results, shares in the internet group had more than halved this year as patience with the search provider’s peculiar approach to doing business wore thin. While trust ebbed from every crack in the financial system, naturally it became harder for investors to rely on management always doing the right thing.
However, a solid set of numbers has bought more time for Google. After hitting a three year trough in normal market trading yesterday, the stock rallied sharply after hours to reach levels 25 per cent above the day’s low point. Revenues up 33 per cent on the year before, and a cut in capital spending levels that boosted cashflow generation, were sufficient to soothe nerves.
Questions remain. Retail sales are a big driver of search inquiries, and consumers are retrenching. On Wednesday Ebay predicted dire times ahead for ecommerce. So it is inconceivable that a company reliant on advertising revenues will be able to pass through a mighty downturn without sharing any of the pain suffered by its customers. Yet by refusing to give any form of forward guidance, or even to divulge more than the bare essentials of financial information, Google ducked this question. Management acknowledged the rapid deterioration in the global economy, but insisted that it will run the company for the long term, cutting costs as necessary.
Growth rates must eventually slow. While still rapid, the pace of top line expansion has declined from a year ago. And the group cannot continue to simply release new services without it being clear how they will generate revenue. But for all that infuriating uncertainty, the group takes almost two-thirds of the market for search inquiries and challengers remain distant. On a reasonable 17 times consensus forward earnings, investors can more than afford to give Google the benefit of the doubt.
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