For Google (GOOG): Now The Hard Part

Google (GOOG) has made believers out of everyone. It is worth every penny of its $640 share price. According to a survey by Barron’s, several large firms including Credit Suisse and Goldman Sachs have raised price targets as high as $800. And, why not? Revenue at the big search company rose 57% to $3 billion when costs of payments to traffic partners were backed out.

Google’s share of search in the US is between 57% and 65% depending on which research firm’s numbers are used.

But, Google’s stock price did not move much after its earnings release. It is doubtful than any news, even the release of a G-Phone will push shares up much before Q4 numbers come out in early 2008.

Google is hiring fast, and that is not surprise. It added over 2,100 employees last quarter to reach almost 16,000.

But, Google now faces the hard part of the climb to the top of the mountain, the $1,000 share price, the market cap as high as Microsoft’s (MSFT).

There is likely to be a recession in the next two quarters. Even if it is mild, ad spending will get hit. Google may do better than most media, but it will feel some effect.

The company is adding employees to get somewhere other than search. Mobile is a big part of that. Competing in the desktop software space. Online video. It is old hat too say that there are most risks and lower margins in these businesses than in core search, but it is worth repeating.

Yahoo! (YHOO) and Microsoft are not likely to do Google any harm in the search business. Google’s challenge is inside the company and in the broader economy. Can it innovate beyond the advertising business before the advertising business cuts into its future?

Douglas A. McIntyre