As Google's earnings and optimism continue to rise, analysts are cautioning the Internet giant to beware of taking costly missteps with its bankroll and its focus.
Google late last week reported that its third-quarter profit was the company's best since its founding 11 years ago. And unlike some other major tech companies, thedismal economy didn't prevent revenue growth, as sales increased by 7% from the same period last year.
With those positive numbers came news that Google plans to hire a few thousand people and to spend some of its capital on promising start-up companies. Those plans come less than a year afterGoogle had announced plans to lay off 100 recruiters, and shutter engineering offices in Texas, Norway, and Sweden.
Industry analysts are split on whether Google's strengthening financial position is a bellwether for the rest of the technology industry. But nearly all of them cautioned that Google should maintain its focus, which they note can be a tough task for a company with coffers full of money and opportunities around every corner.
"Google is strong right now, very strong," said Dan Olds, principal analyst at Gabriel Consulting Group. "With revenue up and a huge war chest, they can make just about any move they want. This becomes even more significant in an environment where acquisition prices are at rock-bottom due to the economy. Google is a rich, fat kid in a candy store having a going-out-of-business sale'."
Olds said it can be confusing and risky to be the rich kid in such a store.
"For Google, there aren't any real constraints," he added. "They can go in any direction they want, which is dangerous. They could squander their energy trying to go in too many different directions."
Rob Enderle, principal analyst with the Enderle Group, contended that a company with cash on hand in buyer's market can be in a dangerous position. That pertains even to very successful companies like Google, he added.
"Google could generate a substantial amount of complexity over a very short period of time and run the risk of creating a company that is unmanageable," he added. "Yes, there are bargains to be had, but Google needs to show they can make past acquisitions, like YouTube, profitable. There's the feeling of throwing [stuff] against the wall in the hopes that something will stick and the result will be beneficial."
On the other hand, IDC analyst Caroline Dangson says Google needs to prove that it can be successful outside of its Internet search business. One way to do that is by acquiring companies that are creating innovative technologies that Google is not, she added.
Ezra Gottheil, an analyst at Technology Business Research, said Google has shown strong discipline in the past, so it will likely avoid spreading itself too thin.
"They're practiced in acquisition," he added. "They're not about to neglect their main business. They've become more disciplined, which is helpful. In the past year, they've eliminated a number of unproductive products and initiatives, including Notebook -- a Web-based clipping file, which I miss -- and television advertising. When the market slowed down, they started to act more like a business."
Google, said Gottheil, has a lot of money and opportunity to play with, but execs there know that they need to have a plan and keep to it as well.