Google More Profitable - But Why?

Google’s stock price has been hitting new heights, with some financial analysts speculating it will reach $200 per share. Why the excitement? Google had a great third
quarter. Revenues doubled compared to the same time period in 2003 — a 105 percent increase, to be exact.

What amazes me is that no one seems to be acknowledging that Google also had a great second quarter. Google’s revenues in the second quarter of this year rose 125 percent compared to the same time in 2003.

In other words, the phenomenal growth when comparing quarterly revenues this year to the same time last year isn’t new. Analysts could see this way back in July before
Google went public. And despite this, many didn’t even think Google was worth $100 per share.

Forget revenue. How about income, the profit Google is actually making? Google’s net income in the third quarter this year versus the same time last year rose 154 percent. Impressive.
But again, not surprising.
After all, Google’s second quarter net income this year rose nearly the same, 146 percent, compared to the same time last year.

Of course, there’s a big qualification to the income figures. Google took a big charge in paying off Yahoo to settle a patent dispute over paid listings. If that charge
wasn’t included, Google’s net income in the third quarter would have been a stunning 512 percent increase over the same time last year, if I’m doing my math right.

Wow. Now that’s exciting. And to see it another way, let’s shift gears and consider the change between the second and third quarters of this year, rather than looking back
to last year.

Revenue for the third quarter of this year rose 15
percent over the previous quarter. But net income, excluding the one time charge, rose a dramatic 58 percent.

In other words, Google doesn’t seem to be doing well because it’s selling more ads. Instead, it’s managing to somehow make much more profit off those sales. How? I wish I
knew. I’ve yet to see that explained in the various pieces I’ve read.

Some reading materials:

• Google’s First Report Is a Goodie from BusinessWeek has a good rundown on
  figures.
• Gaga for Google from CNN Money also has lots of good quotes and observations.
• Google shares go crazy from the San Jose Mercury News has quotes all around, with analysts thinking
  Google will get stronger and those who are dubious.
• Google Investor Relations has links to a release with the most current third quarter figures plus the second quarter ones in the
  June 30, 2004 10-Q filing.