When Google Inc. reports its fourth-quarter earnings later this week, it will see more bears in its Wall Street audience than it has in a long while.
The Internet advertising and search giant has lost some luster. Earlier this month Google’s GOOG, -0.88% shares tumbled to a 15-month low after several analysts downgraded its shares. Factors in this grimmer outlook included the potential impact of the stronger U.S. dollar DXY, -0.22% and increased mobile ads on Google’s financial results, which are slated to be released on Jan. 29 after the market closes.
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The stock has recovered somewhat, with its shares closing at $ 536.93 on Monday. But a pall still hovers over Google, especially after it said it would halt public sales and public testing of Google Glass, its controversial wearable device. The news was fodder to investors who think the company spends too much on risky, long-shot projects and that it needs to make a big acquisition to expand its revenue reliance on desktop search ads.
These questions are now also fueling the debate that Google should start to pay a dividend to investors, as its cash pile continues to mount. In its last earnings report, Google said it had $ 62 billion in cash, cash equivalents and marketable securities at the end of its third quarter.
SunTrust analyst Robert Peck said in a note last week that “while there are valid concerns for Google,” he believes the stock has an upside potential, with a compelling risk/reward ratio and its current multiple. “Adding in the potential of a dividend announcement or other unforeseen potential positives could bolster this case even further,” Peck added, reiterating his “buy” rating.
In the last few weeks, speculation that Google should or will make another big acquisition also popped up again, with Twitter Inc. TWTR, +1.73% cited a few times again as a likely candidate. Peck told CNBC last week that “it’s not lost on Google that Twitter is the best real-time search engine out there,” echoing similar comments made by entrepreneur and investor Mark Cuban, also on CNBC earlier this month when he said Google may be a short-sale candidate.
With all these issues hovering over Google, investors will be heading into the company’s earnings report hoping for some clarity, especially regarding the possibility of a dividend. If indeed Google begins or signals that it will considering paying a dividend, though, some investors may take the news badly.
Dividends signal to growth-minded investors that a company’s torrid growth days are over and that it is settling down. But those investors who are pro-dividend can also point to Apple Inc. AAPL, +0.11% now paying a dividend and expected to report double-digit revenue growth this week.
Mark Hung, an analyst with Gartner Inc. pointed out that Google is “innovating with new platforms and new segments” of its core business. “Google is very good at permeating ads and search across various platforms,” he said. “The fact is they have grown outside the PC segment.”
Meanwhile, Colin Sebastian of R.W. Baird estimates that Google’s core desktop search is now less than 50% of its total revenue, with another 15%-20% of revenue coming from display ads in desktop and mobile, 15%-20% from mobile search, 10% from the Google Play app store, 10% from YouTube ads, 5% from sales of corporate software, and 5% from hardware.
So even if Google does begin to pay a dividend, the bulls and the bears will continue to debate whether or not Google needs a “second act.”