Google+ spurs margin worry, questions about ROI for search giant

Summary:Google appears to have generated some social networking buzz with its Google+ effort, but Wall Street analysts are already wondering about return on investment and the hit to profit margins.

Google appears to have generated some social networking buzz with its Google+ effort, but Wall Street analysts are already wondering about return on investment and the hit to profit margins.

The drumbeat of concern isn't all that surprising given that Google reports its second quarter earnings on Thursday. The search giant's results will have the usual mix of opportunities and concern. Wall Street has been freaking out over Google's penchant for hiring and there won't be any letdown in spending on people and technology.

Indeed, Google+ will color the company's conference call, but a few analysts are going to be asking where the money is. Google is expected to report earnings of $7.86 a share for the second quarter.

Morgan Stanley analyst Scott Devitt last week cut his earnings estimates and price target for Google shares to $600 from $645 based on the company's big spending. Devitt noted that Google's profit margins will decline because the company is hiring like mad, spending more on traditional advertising (TV, radio, outdoor) and betting on new businesses such as Google+ and Google Offers, two efforts designed to ding Facebook and Groupon, respectively.

On the Google+ effort, Devitt said:

Google’s approach to capturing markets is to grow users / market share first, and monetization (profitability) second. We expect them to take a similar approach with Google Offers and Google Plus, which should limit near-term financial contribution even if both products prove successful. Further, these businesses appear to be scale businesses whereby the highest margin profile accrues to the market share leader. If Google is not able to capture a leadership position in the market, it may not enjoy EBITDA margins as high as in its core business.

Other analysts are a bit more constructive about Google+, but also wonder about the investment and potential payoff. Google executives are expected to talk about social networking a good bit on the conference call. "Google+ is incredibly important to Google management and its long-term view of where Google is going. If it is so important to Google management, at its highest levels, we think investors must pay attention," said Macquarie Capital analyst Ben Schachter.

Stifel Nicolaus analyst Jordan Rohan took a longer view. Google+ could position the search giant on a path for torrid growth in the future. Rohan said:

We believe the success of Google Plus is a big deal for Google shareholders. The beta launch of Google's social sharing platform, Google Plus (G+), now counts users "in the millions", even with invitations to the platform scarce. We believe Google's social media effort, spearheaded by G+, will be more impactful for Google shareholders than the company's 2Q11 results.

Rohan added that Google+ could be Larry Page's first big hit as a CEO and turn the focus away from spending toward product results.

Related:

CNET: Google+ invites no longer so scarce

Topics: Social Enterprise, Apps, Google

About

Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

zdnet_core.socialButton.googleLabel Contact Disclosure

Kick off your day with ZDNet's daily email newsletter. It's the freshest tech news and opinion, served hot. Get it.

Related Stories

The best of ZDNet, delivered

You have been successfully signed up. To sign up for more newsletters or to manage your account, visit the Newsletter Subscription Center.
Subscription failed.