Google is searching for clues to fix margin error

Costs which are spiralling may give the Internet company a hard time. What might come to its rescue is the new social networking service, dubbed Google+.

There will be two things in Google’s quarterly results that investors will be mostly talking about – margins and its red-hot social product.

The world’s No. 1 Internet search company knows that the stakes are really high as it fights to ward off challenges from its rivals like Facebook, Apple, Microsoft and Groupon. To counter rising competition, it has ramped up its spending power and is going on an acquisition spree.

Costs which are spiralling may give the Interent company a hard time. Rising expenses shrank Google’s profit margin last quarter. The immediate fallout: the company’s shares hurtled down 8 percent after it reported results. “A declining margin scenario is never good for any stock, no matter how cheap it looks,” said Sameet Sinha, an analyst with B Riley & Co.

What might come to its rescue is new social networking service, dubbed Google+. Sinha said Google+ may take some of the heat off the company for its spending and make Wall Street more comfortable with Google co-founder Larry Page, who took the CEO reins in April. “Google plus is gaining some good buzz from what I see,” Sinha said. “It speaks to Google’s ability to continue to innovate despite its size.”

Since Google introduced Google+ in late June, the company’s shares have risen roughly 11 percent, closing at $538.26 on Wednesday. Analysts polled by Thomson Reuters I/B/E/S are looking for net revenue, which excludes fees Google pays to partner websites, of $6.54 billion in the second quarter, up 28 percent year-on-year and flat from the first quarter.

According to StarMine’s SmartEstimate, which places more weight on recent forecasts by top-rated analysts, Google should post adjusted earnings per share of $7.76, which is 10 cents beneath analysts’ average expectation for EPS of $7.86. Investors are also hungry for details about an investigation by the US Federal Trade Commission into Google’s business practices as well as any commentary about how the European debt crisis is affecting its advertising business.

Reuters