Google Inc's accelerated efforts to carve out a position in the fast-growing mobile and social networking markets leapt into the spotlight on Friday, a day after the giant internet company reported a rare earnings miss.
The company's investments in its Android mobile software and fledgling Facebook-like Google+ social network represent some of the company's key growth opportunities going forward. But Wall Street is still trying to understand the near-term impact on Google's business.
On Friday, Google's shares fell more than 8%. Google missed both its revenue and earnings targets after cost-per-click (CPC) -- or money that marketers pay Google when Websurfers click on its search ads -- decreased for the first time in two years despite record U.S. online commerce during the holiday season. Several brokerages cut their price targets on the stock.
Google+ -- the company's recently-launched social network -- has 90 million users now, up from 40 million three months ago. Android is now the world's most-used mobile software platform, ahead of Apple Inc's iOS, providing an important avenue for consumers to reach Google's various Web services and increasing the total number of people who view its ads.
In the short run, however, the rates for mobile advertising appear to be cheaper than on the company's mainstay desktop search engine.
"We could be seeing a little bit of an effect of more of a proportion of their searches becoming mobile," said Ryan Jacob chairman and chief investment officer of Jacob Funds, which owns Google shares. "They are just not getting the same kind of pricing on the mobile side as they do on the desktop," he said.
Google's heavy investments in mobile and social network initiatives -- to stave off competition from rivals Apple and Facebook -- and its planned $12.5 billion acquisition of smartphone maker Motorola Mobility Holdings Inc have raised investors' concerns.
Larry Page, who took over as chief executive officer in April, said in July that the company was moving to put "more wood behind fewer arrows."
Google's stubborn refusal to offer forecasts on its financials -- a perennial point of contention with its vast investor community -- makes it difficult to delve deeper into margin impact.
But Jacob echoed arguments by other analysts that aggressive investment is needed to pursue top-line growth and that the final-quarter CPC slide was a blip.
Several analysts pointed to longer-term growth trends in social networking and mobile usage that should boost advertising volumes for Google and offset any margin erosion.
"The areas where we're seeing the most growth, Google has a really. really good strategic position. So even though there may be some changes in terms of pricing fluctuations, they'll probably make it up in volume," Jacob said.
"Strategically, they're at a very interesting spot, whether you look at the desktop space, or the mobile space."
Google shares were down 9% at $582.00 in heavy afternoon trade on Friday on the Nasdaq. They had touched a low of $581.83. It was the stock's biggest%age fall in 9 months.
Google executives blamed the decline in search ad rates on forex fluctuations and ad format changes, but analysts wondered whether mobile advertising -- which has lower rates -- played a more important role than the company admitted.
The fall in cost-per-click had led to a barrage of questions from analysts during the post-earnings conference call on Thursday.
The market needs to shift expectations to paid-click growth -- primarily in plain-vanilla display or banner advertising -- and lower its estimates for CPC, Goldman Sachs analysts said in a note.
Several Wall Street analysts called the Google sell-off an overreaction; Barclays said it presents a buying opportunity.
"Don't judge a book by its cover," Goldman Sachs titled its research note on Google.
The company's core results were solid, as paid click growth accelerated by more than a third, margins improved, and display and mobile businesses performed well, analysts said.
The acceleration in paid clicks suggests that underlying demand for Google ads is quite healthy across devices, JPMorgan said, adding that Google is best-positioned for the shift to new media.
Goldman Sachs analysts said: "We expect the growth in mobile to be 146% in 2012 and represent 15% of gross sales as we exit fourth quarter of 2012."
The company still has strong earnings power that will reappear during 2012, Canaccord Genuity said, reiterating its "buy" rating.
Barclays, Baird, Jefferies and JPMorgan also maintained their top ratings on the stock.