Long-term prospects hang over Google's results

Eric Schmidt, CEO of Google attends a session at the World Economic Forum (WEF) in Davos January 29, 2010.

SAN FRANCISCO (Reuters) - Concerns over Google Inc's longer-term prospects may overshadow improvements in the Internet search giant's core business.

Google's withdrawal from China and growing regulatory and legal challenges have pressured its stock price recently. The entry of rival Apple Inc into the nascent mobile advertising business raises the competitive stakes in a crucial market for Google going forward.

Google, one of the top performing large-cap tech and Internet stocks in 2009, is down roughly 7 percent since the start of the year while the Nasdaq is up roughly 7 percent for the same period.

That underperformance could give Google's stock some short-term room to rise if the company delivers a strong first-quarter report, BGC Financial analyst Colin Gillis said.

Google is expected to report on Thursday after the market close.

But the bar for Google's wowing Wall Street remains high, he said, noting expectations about its first quarter business have become increasingly bullish.

Options traders are positioning for a move of just over 4 percent in Google following its earnings report on Thursday, largely in-line with the stock's average and median moves of 3.3 percent over the last four quarters, Susquehanna Financial Group reported on Monday.

Kaufman Brothers analyst Aaron Kessler said investors expect Google's net revenue to be flat to up 1 percent sequentially in the first quarter, whereas the average analyst calls for net revenue to be down 0.4 percent quarter-over-quarter at $4.93 billion.

"If they come in at 2 percent or more (sequential net revenue growth), the stock could go higher," Kessler said.

Google has beat revenue estimates in four of the last six quarters while outpacing earnings expectations for six consecutive quarters. But the real arbiter for Google's stock is not the average analyst estimate but the unofficial "whisper" number, analysts said.

Analysts polled by Thomson Reuters I/B/E/S expect Google to report $6.57 in EPS, up from $5.16 in the year-earlier period. Whispernumber.com, which collects earnings expectations from professional and individual investors, said the expectation for Google's EPS was $6.73.

When Google beat the average analyst revenue estimate for the fourth quarter in 2009, but fell short of the whisper number, its stock price dropped more than 5 percent.

But BGC's Gillis cautioned that Google's earnings could be pressured by a potential pickup in spending at the company now that economic conditions are improving.

"This could be the quarter where we see more expenses, see the reverse of Google back to re-investment mode, and that may catch some people by surprise," Gillis said.

CHINA

Google does not provide financial guidance, but many investors are increasingly focused on the longer-term outlook, particularly in the wake of its change of strategy in China, the world's second-largest Internet market.

Google's moral stand in ending its practice of self-censorship in China and relocating its search site to Hong Kong has won praise from rights advocates, but investors are concerned about the impact on the company's growth prospects.

Investors will be paying close attention to any updates that Google provides about traffic and advertising on its Chinese language search site in the weeks since the change.

"Everyone's talked about what the potential impact could be but I don't think anyone's made that change to their model," said Merriman Curhan Ford analyst Richard Fetyko.

The mobile market is also on investors' radars.

Android, Google's smartphone software, is gaining market share. It is now the fourth-ranked smartphone operating system in the U.S. -- after Research in Motion, Apple and Microsoft Corp, in that order, according to comScore.

But the effort has yet to translate into meaningful revenue for Google, with some analysts estimating that mobile advertising currently contributes less than 1 percent of revenue.

Regulators are holding up Google's deal to purchase mobile advertising company AdMob for $750 million.

Google's core business is chugging along, said JMP Securities analyst Sameet Sinha. But Google is still a one-product company.

"In terms of Google, there's no gravy," said Sinha.

(Reporting by Alexei Oreskovic with additional reporting by Doris Frankel, editing by Leslie Gevirtz)