Why Google Still Looks Like a Long-Term Winner
      Author:JAMES B. STEWART     Source: http://cn.wsj.com     Release Time:5/4/2011 9:09:51 AM     View Times:11083
'Google is not a conventional company. We do not intend to become one.'

Remember those bold words? They date from 2004 and come from the 'owner's manual' issued by co-founders Larry Page and Sergey Brin as part of Google's public offering.

But over the intervening years, as Google grew and prospered, it began to seem pretty darn conventional. Wall Street analysts crawled over every detail of its disclosures, issuing revenue and earnings estimates and clamoring for predictable results. Under former chief executive Eric Schmidt, an experienced technology executive, Google delivered what Wall Street wanted, and Wall Street rewarded Google with a rising stock price and warm 'buy' recommendations. The owner's manual, to the extent anyone remembered it, seemed a quaint and idealistic relic of a vanished era.

Until this month. On April 14, Mr. Page, in his first earnings announcement since succeeding Mr. Schmidt as CEO, said the company had a 'tremendous quarter,' but then unveiled earnings below Wall Street's estimates due to soaring costs. In what was widely interpreted as a snub to analysts, he stayed on the earnings conference call for only a few minutes before departing abruptly without taking any questions. The investor verdict was swift and harsh: Google shares dropped a stunning $47.81—about 8%—the next day.

As a longtime Google shareholder, I absorbed the financial hit. My reaction? Good for Mr. Page. It's about time Google went back to its founding principles.

I concede that Mr. Page might benefit from a quick course at charm school. In the future, a little humility and courtesy might go a long way. But investors shouldn't confuse style with substance. What Mr. Page and Chief Financial Officer Patrick Pichette made clear was that Google is determined to blow through sclerotic bureaucracy and pour money into big, potentially high-yielding investments, no matter what the immediate consequences for quarterly earnings.

Surpassing Estimates

As a shareholder, I'm thrilled that Google actually has big projects it believes are worth pursuing, as opposed to sitting passively on a mountain of cash. As Mr. Pichette put it, 'We are building multibillion-dollar businesses, and we're confident that now is the time to invest.' And investors seem to have ignored the fact that Google's sales grew 27% in the first quarter—surpassing Wall Street estimates.

None of this should have come as a surprise to investors now that Mr. Page is in charge. It is entirely consistent with what he and Mr. Brin advocated in 2004. Rereading the owners' manual reminded me why I invested in Google in the first place: 'If opportunities arise that might cause us to sacrifice short term results but are in the best long term interest of our shareholders, we will take those opportunities. We will have the fortitude to do this.'

In other words, short-term speculators should seek their gains elsewhere—as they evidently did this month after indiscriminately dumping Google shares. As the manual says: 'Our business environment changes rapidly and needs long-term investment.'

How fast is Google's competitive environment changing? Conventional search, which Google dominates, is under pressure from social networking, hand-held devices and cloud computing—areas Google has to pursue aggressively or risk becoming obsolete. After all, Facebook's Mark Zuckerberg was still a Harvard student the year Google went public.

To help retain its talent, Google gave all its employees a 10% pay raise in January, which put pressure on costs and alarmed some analysts. But Google faces intense competitive pressure for talent in an industry where intellectual capital is everything. 'Our employees … are everything,' the manual reads, adding: 'We will reward and treat them well.'

'Don't Be Evil'

Probably the most famous—and ridiculed—passage in Google's offering statement was the following: 'Don't be evil. We believe strongly that in the long term, we will be better served—as shareholders and in all other ways—by a company that does good things for the world even if we forgo some short-term gains.'

But that was the reason I bid for and bought shares in Google's public offering. If Mr. Page's taking the top position means anything, I hope it represents a renewed commitment to Google's founding premises. As the company has grown, it has faced some intractable conflicts—China being the most visible example. But in my view, if Google can adhere to its founding principles, a host of problems—from alleged anticompetitive behavior to invasions of privacy—will be met and surmounted.

This doesn't mean I will blindly follow Google anywhere it leads. At some point, it will have to deliver on its investments. But there is nothing about this month's earnings announcement and ensuing stock plunge that shakes my conviction that over the long term, Google offers one of the best opportunities for investors.

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