Foolish Forecast: Google Will Come Back

The end of the month brings an end-of-the-year report from online search and advertising colossus Google (Nasdaq: GOOG  ) , so it's time to go over the recent past and near future of the company. Here's a rundown of the third-quarter report, and an overview of the numbers. And now let's review the forecast for tomorrow's earnings report.

What Fools say:
Here's how Google's Motley Fool CAPS scoring rates against some of its peers and competitors:

Market Cap (millions)

Trailing P/E Ratio

CAPS Rating

Microsoft (NASDAQ:MSFT)

$303,408

18.6

***

Google

$172,225

42.8

**

Yahoo! (NASDAQ:YHOO)

$27,811

40.4

**

Baidu.com (NASDAQ:BIDU)

$9,220

136.5

**

IAC/InterActiveCorp (NASDAQ:IACI)

$7,275

31.5

***

Data taken from Motley Fool CAPS on Jan. 30.

No company tagged as "paid search" in CAPS currently qualifies for more than three stars. It looks like your fellow investors don't have much faith that free, ad-supported information businesses can support market caps in the tens or hundreds of billions of dollars.

Recent bullish comments praise Google's strong brand and relatively low forward P/E ratio. The bears think that a recession will hit the big G hard, and that the stock is way overpriced even after the recent fall from grace.

What management says:
CEO Eric Schmidt recently used the World Economic Forum as a stage to showcase his hopes for the mobile advertising market. Speaking among luminaries including Al Gore, Henry Kissinger, and Bill Gates, Schmidt said, "It's the recreation of the Internet, it's the recreation of the PC story, and it is before us -- and it is very likely it will happen in the next year." Analyst firm Forrester has predicted a $1 billion economic opportunity by 2012, but Schmidt dismisses that estimate as way too low.

What management does:
The gross profit line is holding steady as always, while ambitious upgrades to the sales, marketing, and research crews are taking operating profits lower. Even at that, the real cash-generation machine is revving up its engines.

Margins

6/2006

9/2006

12/2006

3/2007

6/2007

9/2007

Gross

59.5%

60.1%

60.2%

60.1%

60.1%

60.1%

Operating

33.8%

33.8%

33.9%

33.6%

32.4%

31.7%

Net

25.2%

26.0%

29.0%

29.0%

27.5%

26.9%

FCF/Revenue

16.9%

16.6%

15.8%

15.2%

17.4%

19.4%

Data courtesy of Capital IQ, a division of Standard & Poor's, and reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
The results for this underwhelming holiday season will be very interesting, and should provide us with a better sense of how Google handles the slow spots in a spotty economy. Here's how this Fool sees it:

I am not convinced that a U.S. recession would hurt Google that badly. Online advertising is a cost-effective marketing method that could attract even more businesses from the traditional print and television channels when the advertisers start to feel the pinch. And it's getting harder to argue that the negativity isn't already priced into the stock. I'm a content shareholder, and given Yahoo's decent earnings report last night, I think Google's numbers will be a delight. And Yahoo!'s gloomy forecast could be good news for Google's market share and future revenues.

Further Googlishness:


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