Google Challenge to Facebook will cost more than $200 million
Google’s challenge to Facebook Inc. in social networking, an effort analysts said will cost more than $200 million, probably slowed second-quarter profit growth for the world’s largest Web search engine.
Profit excluding some costs rose to $7.85 a share in the period, Google will report later today, according to analysts surveyed by Bloomberg. Profit would have been higher if not for spending on Google+, a service unveiled by new Chief Executive Officer Larry Page last month to compete with Facebook, said Colin Gillis, an analyst at BGC Partners LP.
“Larry’s here, and he’s here to spend,” said Gillis, who estimates that Google spent about $100 million on the project, half the total, in the second quarter alone. “There are some large opportunities that they’re chasing after.”
Google+, an online tool that lets users create and communicate with groups of friends, is part of Page’s attempt to lure Web users from rivals including Facebook. Higher spending on social networking, mobile software and e-commerce -- areas aimed at lessening Google’s reliance on traditional Internet search -- eats into profitability.
“What investors are thinking about in general right now is return on these investments,” said Schachter, who rates the stock “outperform” and doesn’t own it. “They certainly haven’t shied away from spending money. My view is that this is money that is well spent.”
Sales Boosted By Search
Second-quarter revenue, minus sales passed on to partner sites, likely rose to $6.57 billion in the June period, the average estimate of analysts. Google’s first quarter revenue of $6.54 billion, announced in April, topped analysts’ predictions.
Google, based in Mountain View, California, lost 52 cents to $537.74 at 10:02 a.m. New York time in Nasdaq Stock Market trading. The stock fell 9.4 percent this year before today.
While Google’s sales are buoyed by demand for online ads, margins are likely to keep narrowing into next year amid costs for such services as Google Offers, a feature that mirrors Groupon Inc. by providing daily deals to users at local businesses, according to Morgan Stanley.
“We are encouraged by early progress of Google Plus and Google Offers, but Google faces stiff competition from incumbents who have first-mover advantage,” Morgan Stanley analysts, who downgraded the company to “equalweight” from “overweight,” wrote last week in a research note. “The payoffs of such endeavors may be longer term.”
Adding to costs, Google increased hiring by 1,900, or 7.9 percent, in the first quarter, part of its plan to boost overall hiring by 6,000 this year. Research and development costs rose 50 percent in the March period while sales and marketing increased by 69 percent.
The new service has a look and feel similar to Facebook’s, but with a focus on managing contacts around different relationships. Just days after its debut, Google temporarily shut down the invite mechanism for Google+ following “insane demand,” Vic Gundotra, head of social efforts, said on the company’s website.
“This is definitely one of the slicker products that has come out of Google in a long time,” said Sameet Sinha, an analyst at B. Riley & Co. in San Francisco who rates Google a “buy.”
Google+ is still early in its development, with less than a month for users to try out the service, Gillis said.
“It’s way too soon to make a call on Google+,” he said. “It’s a credible alternative to Facebook, but social networking is all about scale.”
Americans are deeply pessimistic about the future as economic concerns rise and White House talks on raising the U.S. debt limit sputter, according to a Reuters/Ipsos poll released on Wednesday.
The number of Americans who believe the country is on the wrong track rose to 63 percent this month, up from 60 percent in June, with stubbornly high unemployment and prolonged gridlock in Washington dashing hopes of a swift economic recovery.
But voters do not appear to be holding President Barack Obama responsible for the problems so far. Obama's approval rating held relatively steady at 49 percent, down 1 percentage point from June. His approval rating among independents -- a group Obama needs to win re-election -- fell to 39 percent from 44 percent.