Has Google Lost Its Mojo?

 | Jan 24, 2012 | 2:30 PM EST
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Google (GOOG) hit its all-time high in 2007 and I say the stock will never again surpass it. The Google story is played out.

Yeah, I know it has a fabulous balance sheet. I know it has boatloads of wicked cool free services that are supposed to generate billions and billions of dollars of revenue over the next few years. It has super genius and co-founder Larry Page at the helm. The Android operating system has huge market share (250 million users), but no profits. It plans to disrupt a bunch of industries like cable TV and the chauffeur-driven car market with its self-driving automobile. It plans to take on Microsoft (MSFT), Apple (AAPL) and a bunch of other big competitors. The list goes on and on.

But to me, none of these initiatives are enough to move the dial on Google's income statement, nor are they enough to help its bottom line.

Last week, when Google reported earnings, analysts were surprised by the weakness, especially since Google's fourth quarter is usually so strong. Paid clicks rose 34%, but the cost-per-click suddenly dropped. Revenue grew 25%, below the 30% rate that was expected, and net income of $3.12 billion was 9% less than expected. Year over year, net income rose 14.5%, but total expenses rose 38%. Total head count rose to 32,467 employees, up 3% from 31,353 at the end of the September quarter. At the start of 2011, Google had 24,400 employees. Capital expenditures rose 40% sequentially to $951 million in the fourth quarter, up from $680 million in the previous quarter.

The Internet search company continues to spend heavily on new technology, people and facilities (it laid down big bucks for a building in Manhattan in 2010.) I believe this capex spending will continue to increase. In 2011, Google increased capital expenditures about 20% and the company plans to spend 15% more in fiscal 2012. If the Motorola Mobility (MMI) deal is consummated, I see Google spending even more.

But spending isn't the only issue. Google usually has a big fourth quarter, but it didn't materialize this time. The quarter was below expectations due to an 8% decline in the average cost-per-click (CPC). What happened? We never got a full explanation. Did Christmas shoppers stop using Google for shopping? Has the cost-per-click topped out? Are advertisers shifting their budgets away from clicks and towards display ads? Is Facebook stealing away users' time and the ad revenue? Is it the weak economy? What?

I know Google has a lot going for it, but tech investors are momentum investors. No momentum and they move on. Unless this quarter was a one-time event, the stock has put in its high. Could you make money trading it up and down day-to-day, month-to-month?  Of course. But the long ride higher has gotten bumpier, and unless management can get the train back on the tracks, long-term investors could be in for a surprise.

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