Google Beats the Bears

(page 2 of 2)

That's still down from 30% year-over-year growth in last year's fourth quarter and 45% growth in the third quarter. The slowing had put Google's results under a microscope and contributed to the pessimism that prompted at least 16 analysts to reduce Google earnings estimates. Investors had hammered the stock, sending it down 34% so far this year, to 449.54 on Apr. 17 before the earnings report. In extended trading, Google stock rose to 525.96.

Google has attributed virtually all the decline in paid clicks to changes it purposely made. Late last year, it decreased the clickable area around ads to reduce accidental clicks. It also has been gradually reducing the number of search results that return paid ads by tweaking its search formulas to discourage ads that link to sites chiefly intended to capture clicks rather than sell products or provide useful content.

The result, Google and many analysts contended, should be an increase in what advertisers pay per click, since those clicks will be from more serious buyers. That appears to be just what happened. American Technology Research's Sanderson says revenue per paid click rose 17.2% in the first quarter, up from a 14.7% gain in the fourth quarter and a 7.6% increase in the third quarter. Search marketing firms concur that clicks are getting more valuable. "Click prices continue to move up slowly and steadily," says Kevin Lee, executive chairman of search marketing firm Didit.

Concerns for the Future

Even if Schmidt doesn't see clouds on the horizon, other recent reports suggest the company faces challenges ahead. Search marketing firm SearchIgnite said Apr. 15 that Google's share of search marketing spending fell to 70.4%, from 74.5% three months ago, largely at the expense of Yahoo, whose share rose from 19.6% to 24.2%. "We're concerned about intra-quarter trends that showed declining growth," says SearchIgnite CEO Roger Barnette.

And while Google's numbers show ad-click growth isn't slowing as much as comScore figures indicate, some analysts remain concerned about the decline nonetheless. Google still hasn't proved the price-per-click increase is big enough to make up for the overall decline in clicks, says Clayton Moran, an analyst at Stanford Group. "It wasn't as bad as the original fears…but the results don't negate the trend," Moran says. "It is clear that growth is decelerating rather rapidly." Moran has a hold rating on Google, with a $500 price target.

Economic Impact

John Aiken, managing director of Majestic Research, believes that besides Google's own changes, most of the decline in paid clicks is due to Google's mainstay small and midsize business customers cutting back their search-ad spending as the economy sours. "If you're less likely to search for a vacation to Bermuda, you're going to be clicking less," explains R. Michael Leo, CEO of ad technology and services firm Operative.

At the same time, however, Leo sees no slowdown in online advertising to date. And the impact of the slowing economy on online advertising could yet go in Google's favor. Although few believe the industry is immune to a recession, a downturn could drive more ad money online because ads there are more accountable, noted Andrea Kerr Redniss, a senior vice-president at ad agency Optimedia, who spoke at an ad technology conference in San Francisco Apr. 15. If so, it appears Google is in a position to benefit as much as anyone.

Business Exchange related topics:
Google
US Economy
Online Ad Operations
Digital Advertising

Hof is BusinessWeek's Silicon Valley bureau chief.
With Catherine Holahan in New York.