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Google reclaims No. 1 spot in tech world but its hold may be tenuous

July 17, 2013|By Jessica Guynn
  • Google shares have gained 30% so far this year. Above, the tech giant's campus in Mountain View, Calif.
Google shares have gained 30% so far this year. Above, the tech giant's… (Jeff Chiu / Associated Press )

SAN FRANCISCO -- Google Inc. is back on top of the tech world. Can it stay there?

For years, the technology giant grumbled while playing second fiddle to Apple Inc. and Facebook Inc. But with both rivals now on the outs with investors, Google is ascending once again.

On the eve of its second-quarter earnings report, Google shares briefly hit a record high of $928.86 on Tuesday. Now there's speculation that a rosy earnings report Wednesday could push them toward $1,000. So far this year, the stock has gained 30%.

Fueling that heady rise: Google continues to make money hand over fist from search and online advertising. At the same time, it's branching out into promising new areas.

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Its Android software powers more than 900 million smartphones around the world, guaranteeing that Google’s products such as maps and email are as popular on mobile as they are on the desktop. And although ads on tiny screens are not as lucrative as they are on the desktop, causing Google's average ad price to slip on a year-over-year basis for six straight quarters, Google is making strides there too by changing the way it sells ads to get marketers to buy more of them on mobile devices.

Another bright spot for Google: advertising on video-sharing website YouTube. The search giant is also making news and waves by experimenting with new technologies such as Internet-connected glasses and self-driving cars.

One hitch for Google that is not popular with investors: Nearly $1.4 billion in losses and counting at Motorola Mobility, the device manufacturer it bought for $12.5 billion. Google has been taking steps to cut costs and clamp down on those losses, while preparing to roll out a new phone called Moto X, an attempt to recover some of the market share it has ceded to Apple's iPhone.

Next week Google is holding a news conference hosted by Sundar Pichai, a Google executive who oversees the company's Android and Chrome operating systems. Google is expected to unveil its next generation of Nexus tablets, a popular alternative to Apple's iPad.

Also coming this year: a stock split that will ensure that Google co-founders Larry Page and Sergey Brin will retain control of the company. Google recently reached a legal settlement paving the way for the company to split its stock for the first time. That move is expected to slice the trading price in half.

Analysts expect Google to report earnings of $10.81 a share on revenue of $11.4 billion (excluding employee stock compensation and Google’s advertising commissions).

This time last year Google earned $2.8 billion, or $8.42 a share. If not for expenses such as stock compensation and severance for Motorola Mobility workers, Google would have earned $10.12 a share on revenue of $9.6 billion.

"We continue to like the stock and are raising our price target to $1,175 from $925," Macquarie Securities analyst Ben Schachter wrote in a research note.

That said, he and other analysts remain concerned about expenses and the "increasing complexity of the model."

Pivotal Research Group analyst Brian Wieser predicts "inevitable" declines in profitability as Google expands beyond its cash cow: search advertising.

"Our perspective on Google remains unchanged: we see the company producing consistent top-line growth in the high teens and low 20s for many quarters to come," Wieser wrote in a research note. "But diversification is taking root. By our estimates, the high margin paid search business accounted for 74% of the company's revenue base during 2012, vs. 94% in 2009. We believe that newer sources of revenues such as online display advertising, YouTube, Google Fiber, consumer electronics and others are or will be lower margin, and, paired with the ongoing need to pay distribution partners fees related to enabling their search engine as a default tool on mobile devices, expect compression to continue going forward."

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