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

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.

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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

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38 comments
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  • RE: Google spurs margin worry, questions about ROI for search giant

    In my opinion, G+ will die. It takes it's own time to disappear. Google themselves will tell us when that time arrives; just like it did with Wave and Buzz. When it is time for G+ to die, they will release yet another going-to-fail product and divert wall street's attention. Search is the only thing they could do well (and should keep doing well).
    sandeep.splash
    • RE: Google spurs margin worry, questions about ROI for search giant

      @sandeeppolisetty@... Ever heard of Gmail, Google Reader, Google Docs, Android, Chrome? *sigh*
      jhudmon@...
      • RE: Google spurs margin worry, questions about ROI for search giant

        @jhudmon@... Then his comment still stands. "well" is a subjective experience. I do not consider a mail and calendaring solution that only works on-line to be "well". Same is true for a word processor. that is barely better than Wordpad. Android is already fractured in the marketplace and I consider Chrome to be broken. @sandeeppolisetty may also consider these solutions to not be "well".
        Your Non Advocate
      • I too don't understand what all the fuss is about

        Got an invitation. Tried it. Found nothing spectacular about it. About as unimpressive as Facebook. What's the big deal about social network really? Would much rather spend the weekend hiking or sth rather than wandering lifelessly on G+ or FB.
        LBiege
      • Android is copycat of iOS multi-touch, gesture-based UI, and Chrome is ...

        @jhudmon@... WebKit-based.

        However, Google Maps and Google Earth should be probably added to the list of good products (privacy matters aside).
        DDERSSS
    • RE: Google spurs margin worry, questions about ROI for search giant

      @jhudmon Ever heard of Wave, Buzz, Goog-411, Answers, Lively, Google Video, Page Creator, Knol, or Google Health?
      Your Non Advocate
      • RE: Google spurs margin worry, questions about ROI for search giant

        @facebook@... I didn't say "everything they do is great". I was just replying to him saying "Search is the only thing they could do well"
        jhudmon@...
      • RE: Google spurs margin worry, questions about ROI for search giant

        @facebook@... Goog411 lasted for 3 years, and I used it a lot until I had a smart phone. Now that more people have smart phones there's no reason to keep it... Google Video was replaced by Youtube (duh).
        snoop0x7b
      • RE: Google spurs margin worry, questions about ROI for search giant

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        xobcooltorn
    • RE: Google spurs margin worry, questions about ROI for search giant

      @facebook@... Tell that to the millions that use Gmail, Google Calendar, Google Docs, YouTube, Android, Chrome (increasing more rapidly in usage than any other browser). You've clearly never used Gmail and Google Calender if you think they only work online.<br><br>Gmail, Google Calendar, Google Docs and YouTube are even considered best in class.
      bradavon
    • RE: Google spurs margin worry, questions about ROI for search giant

      @sandeeppolisetty@...

      We'll see... I've already got 50 of my friends signed up as of today and I've only had it since last Friday.
      snoop0x7b
    • RE: Google spurs margin worry, questions about ROI for search giant

      @sandeeppolisetty@... <br>I share an office space with 5 colleagues. <br>One closed his Facebook account, one has an active account and another has an account for a project he is developing. The rest of us never had a Facebook account.<br>All 6 of us have Google+ accounts.
      Joaquim Amado Lopes
  • this is just FUD

    spread by M$ and Apple.
    Google makes great FOSS and nobody beats them!
    Linux Geek
    • RE: Google spurs margin worry, questions about ROI for search giant

      @Linux Geek
      yeah, in stealing others idea and technology.
      owlnet
      • RE: Google spurs margin worry, questions about ROI for search giant

        @owlnet How are they stealing ideas? Everyone praised Google when they conquered search. Does that mean they were the first search engine? They were trying to improve on what we currently have. Is there something wrong with that? Should we all just be happy with what we have now? Do you still use Word 97?
        jhudmon@...
    • RE: Google spurs margin worry, questions about ROI for search giant

      @Linux Geek
      This has nothing to do with FOSS; and at the same time, who is M$?
      Ram U
  • Larry, have any more tripe?

    Honestly, is this the best you can do?
    Dietrich T. Schmitz, *~* Your Linux Advocate
  • RE: Google spurs margin worry, questions about ROI for search giant

    "but Wall Street analysts are already wondering about return on investment and the hit to profit margins."

    Has anything good ever come from analysts and shareholders??

    All they care about is money. Frankly, it's a wonder why any corporation bothers to become public. Instantly it becomes "screw the customers, we want more money!"
    CobraA1
    • Get a clue! Without inverstors' money, Google would stil be trying to do

      search correctly. Money talks, and the money has allowed Google to branch out and expand. Google search would still be ranking as high as Ask.com or Lycos. Take the investment money away, and Google will die almost instantly. Investors are the owners, and every owner is entitled to see a return on their investments. Analysts are oftentimes correct in their analysis, as can be witnessed by the many dead or dying projects taken on by Microsoft and Google and Apple and many others. Shareholders cannot continue to risk their money on ventures that aren't productive, and they are the ultimate bosses.
      adornoe
  • RE: Google spurs margin worry, questions about ROI for search giant

    Google + is still only for techies. Let it open for real people and watch the response.
    Raju Das