Google's doing the right thing (but some investors don't get it)

Company defends increase in operating expenses; 'this is the time to invest'

Shares of Google have been getting slammed since the search giant late Thursday announced first-quarter earnings that just missed analysts' estimates.

In early Friday trading, Google (NASDAQ: GOOG) fell as low as 538.17, or 7.0 percent below Thursday's closing price of 578.51. That's after an extended session Thursday which saw Google shares fall 5.5 percent to 546.78.

(Also see: Google shares down on missed Q1 earnings, payroll concerns)

Investors are reacting to two things: 1) Google's net income of $8.08 a share fell short of consensus forecasts of $8.11 because of much higher Q1 operating costs, and 2) Google intends to keep investing in long-term business opportunities.

Google hired almost 2,000 new employees in the first quarter. In addition, last December it gave all full-time workers a 10 percent raise for 2011. That larger payroll worries Wall Street, which prefers lean and mean.

Investors and analysts also are concerned about other operating costs. R&D spending was $1.23 billion in Q1, up 50 percent from $818 million in the year-ago quarter, while sales and marketing costs soared 69 percent to $1.03 billion from $607 million in the first quarter of 2010.

In defending the increase in operating costs during Thursday's earnings conference call, Google Chief Financial Officer Patrick Pichette said the company was "building multibillion-dollar businesses," and "this is the time to invest."

Pichette is right. Now is the time for Google to invest in its future, while it's flush with money and talent. And I think smart investors recognize that.

The battle for talent in particular poses a threat to Google as the social media, mobile and cloud computing booms have spawned a seller's market for Silicon Valley's top techies. Facebook, Twitter, Groupon, Zynga and others are poaching aggressively. (Indeed, Apple just nabbed one of Microsoft's top cloud experts.)

Which is one of the reasons new CEO Larry Page wants to make Google's decision structure less corporate and more agile. He wants his best people to feel that they're still working for a cutting-edge tech company. He certainly can't keep handing out 10 percent raises to everyone.

Google is under a lot of pressure to generate revenue streams beyond its core search advertising business and to capitalize on opportunities in mobile, social media, cloud computing and driverless cars. You can't do all that by changing an algorithm. It takes money.

Pichette said it best in a statement accompanying Google's Q1 earnings release: "It's clear that our past investments have been crucial to our success today--which is why we continue to invest for the long term."

It makes perfect sense to me.

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