For a brief moment after on-line search king Google Inc. reported its first quarterly results as a public entity on Thursday night, the company's share price fell. Then it turned around and headed north at breakneck speed, and continued to do so in regular trading on Friday. Why the reversal? Because, depending on how you look at it, Google either beat analysts' estimates by a substantial amount or missed them by a substantial amount. In the end, investors decided that they either preferred the optimistic version of events, or simply didn't care. The Google train has built up too much momentum to stop now.

In its release, Google said that it made a profit of $52-million (U.S.) or 19 cents a share for the quarter, more than twice the $20.4-million it made in the same period a year earlier. However, that $52-million included the effect of a $201-million settlement the company paid Yahoo as a result of a patent dispute. If that one-time event was excluded from the profit calculation, Google said that it would have made a profit of $125-million in the quarter or about 45 cents a share.

Despite the fact that this represented huge growth compared with the year-earlier period, at first glance a profit of 45 cents looked like a big miss for Google, since the analyst's consensus estimate was for a profit of 56 cents. That's presumably why the stock price fell sharply in after-hours trading. On a conference call with analysts, however, Google said that if its stock-option compensation expenses were excluded it made 70 cents a share.

Rightly or wrongly, most analysts surveyed by Thomson First Call exclude one-time charges from their profit estimates - such things as currency-related gains or losses, investment returns and tax benefits. Most of these analysts get some indication from the company they're following what one-time charges are expected, and then decide which ones are relevant and which are not. In Google's case, however, the company doesn't provide forecasts for revenue or profit, which makes it harder for analysts to come up with a valid profit target.

In addition to the profit question, the market also seemed to ignore - just as it does with Yahoo - the fact that about 40 per cent of Google's revenue of $806-million is made up of "traffic acquisition costs," or money that must be paid to Google's partners in return for sending users to its site. In any case, it didn't seem to matter what charges were being included or excluded from profit or revenue. The stock rose more than 16 per cent on Friday to $173 - a mark that puts it within shouting distance of http://investdb.theglobeandmail.com/invest/investSQL/gx.show_chart?iaction=Generate&pl_period=12D&pl_primary_listing=YHOO-Q">Yahoo's market valuation of $48-billion. Google's stock has more than doubled in price since it went public two months ago.

There's no question that search-related advertising is by far the hottest category of on-line advertising at the moment, as companies focus on buying text ads that pop up beside search terms rather than banner ads or other types. There's also no question that Google is the king of the ad-search market - although Yahoo is trying hard to catch up, which is why it bought search-term advertising pioneer Overture for $1.6-billion last year (the lawsuit with Google was begun by Overture).

However, it's also true that investors (and analysts) are to some extent deluding themselves by saying Google had revenue of $806-million in the latest quarter. In fact, it had revenue of about $500-million, and the rest was money Google had to distribute to its partners in return for sending traffic to its website, so that searchers could then see the ads related to their specific search terms (about 30 per cent of Yahoo's revenue is also made up of traffic acquisition costs).

If you use Google's full revenue number, the stock is selling for about 18 times its revenue per share - a higher multiple than Yahoo (15 times sales) and almost as high as http://investdb.theglobeandmail.com/invest/investSQL/gx.show_chart?iaction=Generate&pl_period=12D&pl_primary_listing=ebay-Q">eBay (22 times). If you use the revenue figure after excluding the payments to search partners, however, Google's stock is trading at close to 30 times sales (on the same basis, Yahoo is about 21 times). When it comes to profit, Google is selling for more than 200 times its profit over the past 12 months and more than 60 times its projected profit for next year.

Investors might also want to remember that those profit estimates exclude all sorts of things, such as the cost of expensing stock options and other unpleasant items. In other words, Google is trading at more than 60 times the most optimistic version of its profit. Can any company justify that kind of multiple? It might be able to if it could double its revenue and profit every quarter for the foreseeable future. But will Google be able to do that?

Mathew Ingram

Ingram: Giddy about Google