New businesses seen key to Google growth long-term

By Eric Auchard

SAN FRANCISCO (Reuters) - Google Inc shares are trading just 3 percent below a record high ahead of its quarterly report on Thursday, but many investors are looking past the strong results expected and focusing on whether it can diversify revenue to sustain growth long-term.

The shares' record high of $641.41, set early last week, was fueled by the company's accelerating market-share gains in the Web search market, which drives its search ad business.

The short-term question for investors is whether Google shares can hold onto recent gains. The stock is up nearly 30 percent since mid-August, when money managers fled a U.S. mortgage meltdown into "safe" tech names.

"Google has done most of its earnings pop over the past couple of weeks," said Todd Greenwald, an analyst with Nollenberger Capital Partners in San Francisco.

"The chances that the stock trades up from Q3 results are even less likely," said Citi analyst Mark Mahaney, who nevertheless recommends investors buy the stock. The shares have shot by his current target price of $600, but he will consider revising that after Google reports.

Investors are looking for clues for when the Internet leader's push into new markets, especially video and corporate brand advertising and the mobile Internet, might pay off.

Video advertising is likely to take 18 months to materialize, Mahaney estimates. A second huge market could be mobile advertising, but he forecasts this area could take three years to become a material contributor to Google earnings.

Wall Street is beginning to focus on valuing Google beyond current 2008 estimates, which are in the process of upward revision. Analysts have raced in recent weeks to raise share price targets above $700.

The average target price by analysts for Google shares is $655.70, ranging from $740 at the high end to as low as $545.

"The Street's current view on valuation could prove too conservative once valuations and price targets are moved toward a year-end 2008 time period," Goldman Sachs analyst Anthony Noto said in a research note last week.

Google's third-quarter report on Thursday will cap a week when many of the biggest technology companies report results.

Analysts expect Google revenue to grow 54 percent from a year ago to around $4.13 billion, according to Reuters Estimates. But ever-larger advertising sales numbers mean Google's growth rate has slid from 70 percent in the 2006 third quarter and 96 percent in 2005.

EYE TO INVESTOR DAY

Google, which is famously loath to provide financial projections to investors, may be more circumspect than usual in the conference call that follows its results on Thursday. It may wait for an analyst meeting on October 24 at Google headquarters to detail some of its future growth plans.

Mahaney said the key question for Google is what will halt its steady year-to-year slide into tech stock maturity?