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Ahead of the bell: High hopes for Google's 3Q

Thursday, 18 Oct 2012 | 6:35 AM ET

SAN FRANCISCO -- Google Inc.'s third-quarter earnings should reveal whether investors' recently rejuvenated optimism about the Internet search leader's growth prospects is justified.

The results, due out after the stock market closes Thursday, will affect a rally that has seen Google's stock price surge by 27 percent since the company released its second-quarter earnings in July. The momentum carried Google's stock to a new peak of $774.38 earlier in the month before retreating slightly. The shares closed Wednesday at $755.49.

The run-up reflects Wall Street's confidence in Google's ability to thrive for years to come as its dominance of Internet search and leading role in the mobile market enable the company to sell more advertising to marketers looking to connect with people on computers and handheld devices.

Investors had been concerned about a yearlong decline in Google's prices for ads appearing next to its search results, but those worries have dissipated because it has become clear the company is more than offsetting that trend by selling more ads in different formats. YouTube, Google's popular video site, is emerging as a major marketing vehicle and Google's Android software for mobile devices is also reeling in more advertising, although at lower prices than on desktop and laptop computers.

This will mark the first full quarter in which Google has owned Motorola Mobility, which was acquired for $12.4 billion in May. Motorola Mobility is expected to report an operating loss that will drag down Google's third-quarter earnings. In addition, Google has already said it will absorb a $340 million charge in the quarter to cover the costs for laying off 4,000 Motorola Mobility workers and closing some the device maker's plants and offices.

The stock market's attention will probably be focused on Google's advertising growth. The company's advertising revenue has risen by at least 21 percent from the previous year in each of the previous 10 quarters, so it will be viewed as a disappointment if the company doesn't at least maintain that pace.

Besides poring through the numbers, investors will be tuning into Google's webcast of management's discussion of the quarter to hear if CEO Larry Page is speaking.

Page, 39, missed the second-quarter earnings conference call because of a mysterious throat problem that the company said made it difficult for him to talk. Page spoke at Google conference on Tuesday, so it now appears likely he will be participating in Thursday's call.

Analysts, on average, are expecting third-quarter earnings of $10.63 per share on revenue of $11.4 billion, according to a poll by FactSet. The earnings projection excludes the costs of employee stock compensation and the revenue figure excludes Google's advertising commissions.

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