By Alistair Barr
Google Inc. shares surged to a record Friday after the
Internet-search giant showed signs of quelling two big investor
concerns: Can it make money from mobile phones and can it be
managed with more discipline?
The 16.3% jump in Google's share price was remarkable for a
company of Google's size. Its $468 billion market capitalization
makes it the second-most-valuable U.S. stock, behind Apple Inc.
Google added nearly $65 billion in market value in Friday's
session, slightly more than the market cap of Lockheed Martin Corp.
and nearly three times the value of Twitter Inc. The increase was
the second largest ever for a Nasdaq stock, trailing only the $66
billion that Cisco Systems Inc. added on April 17, 2000, near the
peak of the dot-com bubble, according to FactSet.
The gains by Google and other tech companies-- Netflix Inc.
rallied 18% on the week after reporting quarterly results--capped a
week that pushed the Nasdaq Composite to a record close. Fellow
online-ad seller Facebook Inc. also reached a record high on
Friday, ending the day with a market value of $247 billion.
On Thursday, Google reported better-than-expected second-quarter
financial results. But the numbers themselves were less meaningful
to investors than the hints that smartphones wouldn't crush
Google's search-advertising money machine, and that Google's
founders, who own a controlling stake in the company, wouldn't
spend their way to oblivion.
It didn't hurt that Google's chief financial officer, newly
arrived from Morgan Stanley, also suggested the Internet company
might share some of its bounty with investors.
"What do we need potentially for capital return?" CFO Ruth Porat
asked, rhetorically, on a conference call with investors. Google
has never paid a dividend or repurchased shares. The company ended
June with $69.8 billion in cash reserves.
On all fronts, the news was subtle, and there are no guarantees
that Google will conduct a big stock buyback or thrive on mobile.
But they represent real shifts within the 17-year-old company, as
it matures and confronts challenges from Apple, Facebook and
others.
For example, Google last year asked employees to work
exclusively from a mobile device one day a week, to better
appreciate how a growing share of users reach its panoply of Web
services. Ads on smartphones have long been a challenge for Google,
because there is less screen space and it is more difficult for
users to make purchases after they click.
In recent months, Google has introduced new smartphone
advertizing formats for cars and mortgages, adding to
mobile-friendly formats for hotels, flights and insurance.
It's also trying to better link ads consumers see on smartphones
to what they buy in physical stores, as a lure for advertisers.
This month it began testing a buy button on mobile shopping search
ads, which could make it easier for people to purchase on their
phones.
The price of Google's mobile search ads remains lower than those
shown on personal computers. But the gap is narrowing.
Digital-marketing agency Merkle RKG said its clients paid 58% more
for a click on a desktop search ad in the second quarter, down from
a 65% difference a year ago.
At digital-marketing firm IgnitionOne, clients pay an average of
73 cents a click for Google mobile ads and $1.06 for desktop
versions, a 45% difference.
Advertisers are shifting to mobile to follow their customers. In
the past two years, online T-shirt design company CustomInk has
increased its spending on Google's mobile search ads tenfold, while
spending on the desktop versions are flat. The price the firm pays
for each mobile click has more than doubled, while for desktop it
is paying about the same.
"That's where the customers are and where the searching is,"
said Sean Murphy, CustomInk's executive vice president of
e-commerce.
But Mr. Murphy remains wary, because he can't always measure
whether mobile search ads lead to purchases, unlike on PCs where
every action can be tracked. This is especially true because people
often search on their phones and then buy it later on their PC, he
explained.
"I don't think Google is out of the woods yet," Mr. Murphy
said.
Ben Kirshner, CEO of digital marketing firm Elite SEM, said the
smaller screen of smartphones now sometimes works in Google's
favor. Because fewer ads are visible, he says, advertisers are
increasing their bids to ensure that their ads can be seen. He
predicts that the prices of mobile ads will equal those of desktop
ads by next year.
The bullish news on mobile advertising was accompanied by signs
of cost controls at a company better known for far-flung projects
such as solar-powered drones and self-driving cars. New hiring at
Google fell for the second consecutive quarter and spending on
research and development was roughly flat with the prior
quarter.
Ms. Porat, the CFO, said she is working with Google business
leaders to become more disciplined and efficient on spending and
investing, signaling caution on some of the company's longer-term
riskier projects, known as moonshots.
In response, investors bid up Google's shares by $97.84 to
finish Friday at $699.62. The shares have now gained 32% on the
year.
Write to Alistair Barr at alistair.barr@wsj.com
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