February 1, 2007 - Are Google investors getting spoiled? Even though Google (GOOG) managed to blow away fourth-quarter earnings on Jan. 31, its shares fell by about 1% in extended trading.

The sellers may have missed the real import of the search giant's report: More than ever, it's got the entire advertising world in its sights. And this year, Google will come out with guns blazing.

Investors, who had boosted the stock 1.5% before the report, may have hoped for a little stronger revenue growth vs. the third quarter than the 20% Google reported. "Expectations got ahead of themselves," says Scott Devitt, an analyst with Stifel, Nicolaus. But mostly, some investors decided to pocket some profits following a 10% rise in the stock so far this year.

 And Google had profits to spare. It earned $1.03 billion, nearly triple a year ago, on a 67% jump in revenues, to $3.2 billion. This was the ninth of 10 quarters as a public company that Google, which now accounts for about a quarter of all online advertising, outperformed expectations.

The big drivers this quarter: strong growth in traffic thanks to holiday shopping and improvement in the effectiveness of ads placed alongside Google's search results. In fact, according to Chief Executive Eric Schmidt, Google is showing fewer ads per search on average but is making more money because it's more carefully targeting ads to the most commercial sites. "The targeting and the technical work that we are doing is producing better return for advertisers, better revenue for us, with even fewer advertisements," he told analysts during a conference call.

Perhaps most interesting for Google's future, it's now apparent that advertisers are viewing search—and Google—in a new light. Up to this point, search ads have been almost solely considered a direct-response medium, where advertisers can measure how many people they reached by tracking the number of clicks and subsequent purchases or other activity.
Aiming Big
 
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