Bullish on Google, but Only Till Earnings

 | Dec 08, 2011 | 1:42 PM EST  | Comments
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I'm a fundamental investor, though I do respect market technicians and their ability to read market swings and individual stock movements. So I'm not expert on this matter, but I'd call your attention to Google's (GOOG) yearly chart. This is the fourth time since January that the stock has traded up to the $620 level.

Each previous time, the stock has swung back down, and that was usually on some European news. There were earlier times when investors worried about CEO Larry Page's ability, or inability, to answer questions on the earnings call or on runaway headcount costs.

However, it's currently an interesting moment for Google. Presumably Larry knows a lot more now about being an effective communicator than he did earlier this year. He's been staying on script for the quarterly earnings calls, and Wall Street analysts seem to like what they hear. After the hiccup of first-quarter earnings with bigger employee costs, Google has outperformed Wall Street's expectations for the remainder of the year.

The company is now sitting in between earnings seasons. We won't hear from management for another six weeks. So where do we go from here?

If the market rallies into year-end, obviously Google shares will shoot above this $620 level, and that could draw in a lot more buyers. So, in the short term, I believe the stock is set to make a run toward its 2011 high, the $640-to-$650 level, and maybe higher.

As for what we should expect in 2012, as I've said before, I believe the biggest challenge Google faces is its revenue slowdown in index search. It needs to keep filling the top of the funnel with new revenue. Google did that this year with the help of Kayak.com, and it also pointed shareholders to gains in mobile search, YouTube and display. It has additionally tried to pump up market share gains with its Internet browser, Google Chrome.

While Chrome's growth has been noteworthy, the problem of slowing index-search growth remains. Just pointing to annualized improvements in nascent business areas, as well as to Android activation numbers and member numbers for its Google Plus social network -- absent real revenues -- is likely to make shareholders grumble more.

As a result, expect Google to go back to the well of making another big, revenue-enhancing acquisition in 2012. On that subject, 2012 will be extremely important to the future of the company, as we'll find out if its deal to buy Motorola Mobility (MMI) gets approved. Assuming that does happen, we'll discover how well the search giant does at managing it and consolidating the financials with those of Google as a whole.

The bottom line: I'm bullish on Google in the short term (i.e., the next six weeks), but bearish for the middle- to long-term.

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