Google+ Pleases Investors

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Ahead of its latest earnings report, Google+ is giving Google investors warm feelings

The Google+ social network has generated a tremendous amount of buzz as Google gets ready to bid adieu to the second quarter with its earnings report on 14 July after the bell.

Investors polled by Thomson Reuters expect the search engine to report net revenue, of $6.54bn (£4bn), which is up 28 percent from the prior year.

Social networking revenues

The period marks the first period in which Google chief executive Larry Page took the reigns from Eric Schmidt.

More interesting will be the tenor of the earnings call with financial analysts, which are bound to pepper Google’s management with questions about how Google will make money from Google + and how the investigation by the Federal Trade Commission of Google’s search ad practices is impacting the company.

Until late last month, the big news would have been concerns the FTC antitrust inquiry, but then came on 28 June and the launch to limited beta of Google+, the company’s bid to challenge Facebook’s social networking crown. Since that storied launch, the company’s shares have increased some 9 percent, closing on Monday at $527.28.

Google+ isn’t contributing anything to the company’s bottom line yet, but Google+ is off to solid start. Ancestry.com Founder Paul Allen said the number is about 10 million users, and could hit 20 million this weekend.

Global Equities Research analyst Trip Chowdry said Google’s Circles social graph builder, which lets users categorise contacts in several buckets, the Sparks topics feed and Hangouts video chat service “significantly improve the usability, monetisability and user control in Google+”.

Facebook clutter

“Converged view is – on a scale of 10… private beta of Google is probably 8, while Facebook is probably 6.5…” said Chowdry. “Facebook has ‘got too cluttered over time’ was a common complaint we heard.”

Chowdry also noted that in response to the Facebook clutter, developers have created several applications to help users move their Facebook content to Google+. Move2Picasa, for example, lets users migrate their Facebook photos to Google+, which is linked to Picasa.

On the strength of Google+, Chowdry said he is ratcheting up his fiscal year 2012 estimates, boosting revenues excluding traffic acquisition costs from $31 billion to $34 billion and raising earnings per share from $37 to $42. He is maintaining his current fiscal year 2011 estimates of $27.38 billion and EPS of $33.52.

Not every equity analyst is so sanguine about Google+, particularly when it isn’t impacting Google’s bottom line for Q2.

Gleacher & Co.’s Yun Kim said Google+ service, the company’s Android and Chrome businesses and the company’s push into local advertising (with Google Places, Boost) may require a higher level of investment that could weigh heavily on Google’s cost structure.

‘High risk’

“With GOOG’s recent realignment of business segments to refocus its efforts on strategic areas, we believe the company continues to carry a high level of risk associated with both the timing and the amount of investment needed to fuel its growth strategy going forward,” Kim wrote in a research note on 12 July.

Google’s biggest risk long term is the uncertainty regarding the increasing regulatory scrutiny, but with regards to its acquisition plans and its search ad business. The FTC’s scrutiny could take a year to bear fruit, if there is any fruit to bear at all.

Also unclear is what will become of Android regarding Google’s suit with Oracle, which is suing the search engine for infringing on Java technology used in the open source operating system.

In the meantime, most pundits and analysts will watch Google+’ impact on Facebook’s user engagement in earnest.

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