Analysis: China won't kickstart Google but shares attractive

The logo of Google is pictured in front of its former headquarters in Beijing, July 1, 2010.

NEW YORK/SAN FRANCISCO (Reuters) - Google Inc's success in keeping a toe in the China market may not put to rest Wall Street's concerns over the search giant's ability to maintain its rocket-like growth momentum of recent years.

But Google (GOOG.O) shares, considered by many to be overvalued for most of last year, are now starting to look attractive after having shed a fifth of their value this year, analysts say.

"We think Google is a very good long-term investment, but not because of China. China is probably the area where they clearly struggle the most," said Ryan Jacob of the Jacob Internet Fund, which holds positions in both Google and its biggest rival in China, Baidu Inc (BIDU.O).

"Away from China, Google is a very strong global business with extremely high returns and a very enviable market position. And the valuation is very undemanding at these levels."

Google shares have fallen 26 percent so far this year, underperforming the Nasdaq composite index's .IXIC 4 percent drop. Thomson Reuters' StarMine estimates that Google's current share price implies a 10-year earnings per share compound annual growth rate of only 10.3 percent. Google's 5-year historical average EPS growth rate has been 69.4 percent.

Aside from its censorship dispute with the Chinese government, which has jeopardized its future in the world's biggest Internet market as measured by users, Google also faces challenges growing revenue in three key focus areas: mobile, display advertising and video site YouTube, analysts say.

Google needs new sources of income since it will be hard to significantly grow search when it already holds a more than 60 percent share of the U.S. search market. There are also fears about a reversal in the global economic recovery, given high U.S. unemployment and the European debt crisis.

The company's problems in China are deflecting its focus from the European continent, which deserves much more attention, said Oppenheimer analyst Jason Helfstein.

"The reality is what is happening in Europe has a much bigger impact on Google's fundamentals," he said, citing concerns that advertising spending by European businesses could be dampened by the sovereign debt crisis.

Google does not break out revenue from Europe, though it says international revenue accounts for 53 percent of its total revenue in the first quarter, and singled out the United Kingdom as accounting for 13 percent of the total.

SITUATION IN CHINA SEEN FRAGILE

Google said on Friday that China has renewed its webpage license in the country, soothing some concerns that the Internet company might get kicked out for refusing to censor Chinese Web search results.

But while Beijing permitted Google to continue doing business in China, that does not mean the pay-off will be immediate -- if it even comes at all.

Google's revenue in China is estimated by analysts at around $300 million to $600 million, a fraction of its $24 billion annual revenue. It has a roughly 30 percent share of China's billion-dollar search market, far smaller than Baidu.

Atlantic Equities' Hamilton Faber described the China license renewal as a "minor positive" for Google, its shares rising 2.4 percent to close at $467.49 on Friday.

"I still think their long-term position in China is very fragile," he said, adding that Google faces an uphill battle to grow its search advertising revenue in the country.

Tension between Google and Beijing in the past months has put Chinese advertisers on alert.

Advertisers "don't really want to be on the wrong side of the government," said Jacob. "Now that Google has had problems with them in the past, it probably does make them less attractive and a little more risky to advertise with."

Perhaps Google is better off concentrating on other areas like television and mobile, said Colin Gillis, director of research at BGC Partners, who called Google's efforts in China "a drag on management's focus."

Citi analyst Mark Mahaney is bullish about Google's non-search investments, and maintains a "buy" rating on the stock with a $630 price target or 20 times estimated 2011 EPS. He believes mobile, display ads and YouTube will account for a combined half a billion in revenue by the end of this year.

"I think the market has reached a point of skepticism just prior to when these business are finally becoming material. That is why I like the stock," Mahaney said.

Thrivent Financial fund manager Mike Binger, which holds a position in Google, thinks it's time to strike while the Street still has negative sentiments.

"I still see this company growing sales and earnings 15 percent plus, which is pretty rare these days," Binger said. "And it's not $600 plus (per share) anymore, it's $400 plus. To me that's a good deal."

(Reporting by Jennifer Saba and Alexei Oreskovic; Editing by Tiffany Wu and Richard Chang)