Are Clouds Gathering Over Google’s Stock?

Google (NASDAQ:GOOG) has been down nearly 10 percent following lackluster earnings last month, and by some accounts the outlook is grim for the Mountain View mega-searcher. Despite the innumerable projects and products it has released, Google continues to rely on search as its primary earnings growth mechanism, and while revenues have increased year-over-year, it remains unclear whether net income will continue to grow.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Advertising currently makes up about two-thirds of Google’s total revenue, with mobile advertising accounting for more than half of that. This is, of course, nothing new; we have search and advertising revenues to thank for the ascent of Google’s stock price over the past few years. Yet the prospects for growth remain questionable. Cost per click on ads, or what advertisers are willing to pay Google for each advertising click, has been on the decline for 4 consecutive quarters. Users are half as likely to purchase a product after clicking on a mobile ad, as opposed to a PC ad, and thus far that statistical reality has served as a bargaining chip for advertisers. Google CFO Patrick Pichette also cites “currency headwinds, the balance between developed and emerging markets, the number of ads shown on Google sites versus other sites in its network and changes in types of ads” as factors, but the fact remains: advertising is going mobile, and mobile advertising is less profitable so far.

Meanwhile, anti-trust concerns continue to plague prospects for growth in search. The Federal Trade Commission and European Commission continue to investigate Google for anti-trust violations relating to search, and the favoritism Google allegedly displays towards its own products, (e.g. Google Maps, YouTube, or Google Images). One can only wonder what the growth prospects are in search when the company is already being investigated for anti-trust violations. How much more can Google grow this area of its business without attracting more negative regulatory attention?

Other more popular Google properties – Google Drive, the Android mobile platform, Gmail – are not highly profitable products. They keep Google at the fore in our every day lives, but as we’ve seen from the Facebook IPO, popularity contests don’t generate cash. Google Books had potential, and yet the company seems to have made little progress with that project since Judge Denny Chin rejected the Google Books settlement last year.

Still, Google has some new products on the horizon worthy of consideration…