Google's Earnings No Sign Of Tech's Direction

Tech stocks will sell off because of weakness in Google’s (NASDAQ: GOOG) earnings. They should not. Google’s numbers are not a sign of anything beyond its profligate spending. The search engine company’s net income rose 17% to $2.3 billion. But, operating expenses were up 54% to $2.84 billion.  Google management continues to pour money into hiring new employees. That has nothing to do with the earnings fate of other internet or technology companies. Google’s earnings are Google’s earnings.

The first thing investors said about the search engine company’s numbers is that new CEO Larry Page has no fiscal discipline. Actually, the run up in spending happened under previous CEO Eric Schmidt. He is to blame if anyone is. It is his gamble that more engineers will buy help Google expand into more profitable businesses beyond search.

Google’s spending is frightening to most Wall St. investors. It should not be entirely. Google understands that it could be the next Yahoo! (NASDAQ: YHOO). Innovation may not maintain Google’s status as one of the greatest tech companies in the world, but a lack of spending will make sure it loses its place at the summit of Mount Olympus. Google has cash and some promising products like Android. Investors only need to see one new source of significant sales and they will settle down because Google has diversified beyond search, even if just a little.

Google is often compared to Apple (NASDAQ: AAPL). If the search company is less innovative than the consumer electronics company, the chances Google has an unfavorable future rises. There is a strong case to be made that both companies can thrive without one damaging the other.   The Android- based phone may take market share from the Apple iPhone and iPad  That has not happened yet even though Android’s share of the mobile OS market is huge and growing. Apple can barely keep iPads on the shelf.

Apple has said it will not get into the search market. However, apps can be downloaded by people into a sort of search product of their own. A person who has a weather app, a Facebook app, and a news app may not need Google at all. But, Google is loaded on nearly every smartphone because of  an overarching utility that 100 well-chosen apps cannot replace.

Google probably spends too much money now; it is a risk the company has to take. That decision bears no relationship to the decisions of any other tech companies even if a sell-off of tech stocks says otherwise.

Douglas A. McIntyre