- Associated Press - Friday, July 16, 2010

SAN FRANCISCO (AP) - Google Inc. is doing its part to stimulate the economy and hurting its stock in the process.

With its payroll swelling at the fastest rate in four years, some of Google’s expenses are climbing faster than its revenue.

That’s creating a drag on its earnings, which is pulling down the Internet search leader’s stock price.

Consider Google’s second-quarter results released late Thursday. Both net income and revenue rose 24 percent from the previous year, but that didn’t impress investors because the earnings missed the target set by analysts.

Google shares dropped $23.32, or 4.7 percent, in Friday premarket trading. The stock had closed Thursday at $494.02 and declined in extended trading.

Here’s the main reason for the earnings letdown: Google is spending more to maintain its commanding lead in Internet search while it also tries to diversify by developing products in other promising niches such as online video, mobile devices and computer operating systems. To help achieve its goals, the company added nearly 1,200 employees in the second quarter to end June with more than 21,800 workers.

Google, based in Mountain View, has hired nearly 2,000 workers through the first half of the year, putting it on pace to add the most people to its payroll since 2006 when it ushered in 6,100 new employees in 12 months.

The European debt crisis also worked against Google in the April-June period.

Investors are worried the euro will crumble if governments in Greece, Spain, Portugal and Italy default on their perilously high debts.

Those fears hurt Google because about one-third of the company’s revenue comes from Europe, and customer payments made with the euro translated into fewer dollars than a year ago. Even so, the currency squeeze wasn’t as severe as some analysts anticipated.

The dollar seems more likely to weaken than Google’s commitment to bring in more engineers and sales representatives to peddle the online ads that generate most of the company’s income.

Without making specific projections, Google’s management left little doubt substantially more people will be joining the company in the months ahead as it pursues long-term opportunities.

Google is building a business not for this quarter or the next quarter, but an infrastructure for the next half-decade to decade,” Patrick Pichette, Google’s chief financial officer, said in an interview late Thursday. “What a great moment for us to invest to create these fantastic products that everybody is going to live on.”

Even as Google sacrifices earnings growth, it is accumulating more cash. Google had $30 billion at the end of June, up from $26.5 billion. And it might not even use that money to invest in new technology or buy more companies. That’s because the company revealed Thursday that it may borrow up to $3 billion on the premise that its money managers can realize investment returns that outstrip its borrowing costs.

Although Google remains the Internet’s most profitable company, investors have been fretting about signs of decelerating growth amid stiffer competition from Apple Inc., Facebook and Microsoft Corp. On top of those challenges, a showdown over online censorship in China has muddied Google’s future prospects in the world’s most populous country.

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