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Google Earnings Preview

The big week in Internet earnings reaches a crescendo this afternoon when Google reports earnings. These numbers come at a fascinating time in the company's history.

Google has become a kind of financial underdog, compared to other big names in the sector, including Yahoo, which is still licking its wounds, and eBay, which is enjoying its second beat-and-raise quarter in a row -- a strange position to be in for a company trading at nearly $500 a share.

This time around, Google's numbers are almost background noise to the broader issues hanging over this company. Shares have gone virtually nowhere these past six months, after that steep jump last November. Google seems stalled as ever-savvy investors look beyond the almost daily headlines of new business ventures and partnerships and start searching for the return on those investments, which, to date, haven't materialized yet. There seems to be a fair amount of frustration that the company can't seem to generate new revenue from something outside search, despite a massive R&D budget.

Google continues to sign new advertising partnerships with TV networks, cable networks, newspapers. It's added a number of new, hosted applications, such as new mapping software.

"What investors are focused on is 'when do we see the (return on investment) on that investment,' and 'if I don't see the ROI, do I need to buy the shares now?'" asks Mark Mahaney, the net analyst at Citigroup.

Mahaney thinks the answer is "yes." He points out that the stock is trading at a very attractive multiple and close to "trough valuation" right now since he fully expects to see at least the beginnings of a nice return on some key investments later this year.

He also says analysts will be paying very close attention to operating margins, which posed the biggest problem for the company in its December quarter when Google reported a surprisingly steep decline. He expects a 4% year-over-year operating margin decline today, but if it's any deeper, you may see a sell-off. He doesn't expect that, and with such a stalled performance, the time might be right for investors to get in.

"Expectations are cautious, are muted, are correctly conservative, and on an upside quarter; that gets you more return out of Google shares than eBay and Yahoo where expectations clearly have risen," he says.

The other issues that likely will come up on the company's conference call at 4:30 p.m. ET:

* An update on Google's planned $3.1 billion acquisition of DoubleClick, and whether the Justice Department has indeed asked for a second look into the deal, as Google competitors Microsoft, AT&T and Time Warner have requested.

* An update on Google's new revenue-share plan for its YouTube property. The widely expected move came to light earlier this week after comments from CEO Eric Schmidt at a Web conference in San Francisco. The company would share 50-50 revenue with content creators who upload videos that would feature ads at either the top or bottom of the videos themselves. This could not only generate real revenue but alleviate some of the copyright infringement complaints YouTube has faced.

"We're busy building an online video advertising solution," Schmidt said at the big National Association of Broadcasters convention in Las Vegas earlier this week. He said the new approach would make it "possible to monetize videos on YouTube," but he didn't offer a time-table or specifics as to how much money YouTube could generate.

James McQuivey at Forrester said it could be "billions," but many on the Street say estimates like that are far too optimistic.

* An update on the big, billion-dollar copyright suit filed against Google and YouTube by media giant Viacom. Google says its new "Claim Your Content" software debuting on YouTube shortly will make that lawsuit irrelevant. Yet the software will only protect content from here forward and doesn't address past allegations of infringement, or Google's apparent dismissal of them, which became a key complaint in the Viacom suit -- something I asked Viacom CEO Phillippe Dauman about in my exclusive interview with him at the recent CTIA wireless show in Orlando.

"It is kind of interesting when Google acquired YouTube, they set aside a substantial amount of money to cover copyright liability," Dauman told me. "So they weren't innocent going into the party. I find it inexplicable quite honestly, and I was very patient over many months. I find it inexplicable that they took the attitude they did, which is not an attitude that any major company that I know of has taken."

He added, "The copyright issue is important for people like us: big companies, small companies, individual filmmakers. It is important for them to have their copyrights respected so that they can get the fruit of their labor. If you get to a world where that is not respected, you will see less innovation, less creativity and that is bad for consumers."

* An update on word today that the European Commission has sent a warning letter to Google complaining that its data privacy system does not meet the EU's privacy standards. That's a big slap in the face for a company that says "privacy rights" are a top priority. The question now is just how serious this development is, or how serious it may become, and whether it could hurt Google's business across the pond.

Oh, and against all that, the Street expects $3.30 a share on $2.49 billion. Should be a very interesting report and call after the bell today.

Questions? Comments? TechCheck@cnbc.com