July 22 (Bloomberg) -- Shares of Google Inc., the No. 1 Internet search engine, fell after the company said sales gains may wane this quarter, the first indication of a slowdown in the growth that has propelled the stock to record highs.

Shares of Mountain View, California-based Google fell as much as $20.62, or 6.6 percent, to $293.32 in Frankfurt from the record close of $313.94 in the U.S. yesterday. The stock traded at $294.84 as of 10:45 a.m. in Frankfurt. In Google's five previous earnings reports since going public, the shares had surged at least 5 percent the following day.

While keeping to a policy of not forecasting earnings, Google Chief Executive Officer Eric Schmidt said yesterday that analysts shouldn't assume sales growth this quarter will match the 15 percent growth achieved in the same period last year.

The comments surprised some investors who were expecting Google to be more upbeat after surging advertising sales pushed up second-quarter earnings fourfold. Google's report followed Yahoo! Inc., the No. 2 search engine, which this week forecast revenue would miss analysts' estimates. Schmidt, 50, told analysts on a conference call that the third quarter is ``slower'' than others.

``You could see the stock sell off when they said that,'' said John Tinker, an analyst at ThinkEquity Partners in New York. ``The expectations were way, way high.''

Second-quarter revenue rose 10 percent from the first quarter, the slowest pace since Google went public in August, and profit margins shrank for the first time as the company almost doubled spending. Google reported sales of $1.38 billion and profit of $342.8 million, or $1.19 a share.

Disappointing Investors

Google joined Microsoft Corp., which also reported yesterday, and Yahoo! Inc., No. 2 in search, and Intel Corp., the largest maker of semiconductors, in disappointing investors with results. Shares of Google had more than tripled in the past year, and Microsoft and Intel shares both jumped in the past month on expectations they would beat estimates and forecast better results.

``People think companies are being conservative about the next quarter and, combined with the strong run over the past two months, some may be thinking it's time to take some money off the table,'' said Chuck Jones, who helps manage $15 billion, including Google and Microsoft shares, at Stein Roe Investment Counsel in San Francisco.

Yahoo shares dropped 13 percent in two days after reporting revenue, excluding fees paid to other sites, rose 44 percent to $875.1 million, missing estimates of $882.7 million. Intel shares have dropped 5.9 percent after reporting profit margins that were narrower than expected.

Microsoft

Microsoft, the world's largest software maker, said net income rose 38 percent to $3.7 billion after a tax benefit and faster sales growth than it's seen in nine months. Sales rose 9.4 percent to $10.2 billion as network software sales accelerated and the company boosted signings of long-term contracts ahead of analyst expectations.

The company's sales forecast for the current quarter disappointed investors and the shares fell as much as 69 cents, or xxx percent, to the equivalent of $25.75 in Frankfurt from the close of $26.44 in the U.S. yesterday.

Spending on marketing for a new Xbox video-game machine and SQL database program slated for release in the December quarter will cut into profit. Meanwhile some customers of both products will wait for the new versions and Microsoft won't release new Xbox games during the current quarter.

``The fact that the forecast is slightly down there is upsetting for some investors,'' said Patrick Becker Jr. of Becker Capital Management in Portland, Oregon. The firm manages $2.4 billion and owns more than 1 million Microsoft shares. ``Microsoft is expecting business to slow in the first quarter because of the new Xbox and SQL.''

Google Margins

Google's operating margins shrank to 34.4 percent from 35.2 percent in the second quarter and may fall further as the company keeps spending, Chief Financial Officer George Reyes said.

The company is opening research and development facilities in countries including China, increased its workforce by 20 percent last quarter and is adding new features such as maps and better search results. Research and development doubled to $95.8 million, and capital spending rose 64 percent to $157.5 million.

Reyes said third-quarter revenue growth in Europe may slow, noting that sales last year were abnormally strong because of publicity surrounding the company's initial public offering.

``You shouldn't just take that growth rate and extrapolate for this year,'' Schmidt said in the interview.

Some analysts said Google's comments on the third quarter broke its vow of not giving analysts a steer.

``Here's one of the most sophisticated technology firms in the world, who have tried to avoid playing Wall Street's game, resorting to a very traditional nod and a wink,'' Tinker said.

To contact the reporter on this story: Jonathan Thaw in San Francisco at jthaw@bloomberg.net.

Last Updated: July 22, 2005 04:49 EDT