Has Google Peaked?

Posted by: Rob Hof on February 26, 2008

That seems to be the central question on investors’ minds today as they digest news from comScore that clicks on Google’s paid search ads were down 12% in January from October and flat from a year ago. Google’s stock, already hit in recent weeks from a disappointing (if hardly disastrous) fourth quarter and growing worries that the economic downturn would hurt online advertising, was down as much as 8% at one point today, even after a 4% drop Monday.

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As the trading day wound on, the pile-on let up a bit, so Google’s stock was down less than 5% at the market close. But the concerns remain. How valid are they?

I don’t think they can be ignored. At some point, even if online advertising continues to take an ever-greater chunk out of the hides of traditional media channels, it has to get affected by lower consumer spending. So as Silicon Alley Insider’s Henry Blodget notes, the Google bulls are straining to discount the comScore data and resulting sell-off of Google shares.

But it still seems to me the impact could be more muted than investor reaction to the comScore news would indicate. For one, Google’s still driving a lot of traffic to online retail sites, notes Bill Tancer at Hitwise. He thinks that if a recession were affecting paid search, there should be a drop in the amount of traffic going from Google to online retail sites. But in fact, he says, “Google traffic to retail, on a monthly basis, is on the increase compared to previous years. If we focus in on daily data (year-over-year comparison) we see that Google traffic to retail is also up on a daily basis when we compare January/February 2007 with 2008.”

Google also has taken conscious steps to reduce accidental clicks. The company contended last month that a significant reason for lower-than-expected click growth in the fourth quarter was the result of reducing the clickable area around ads to avoid unintentional clicks. That seems reasonable, if not sufficient to explain the Comscore numbers. But such a move may well mean more revenue per search, at least longer-term, as advertisers see that they’re getting more people actually intending to visit or buy something. That could mitigate to some degree a recession-driven decline in paid search clicks.

So what to think? It could well be that Google, which does not provide guidance to analysts, is finally seeing the impact of a recession. That would be pretty big news, and good reason for investors to think that maybe Google isn’t a momentum stock anymore.

But it seems doubtful that paid search, thus far the most targeted and effective advertising on the planet, is suddenly going to tank. And that probably means Google’s actual business could prove more resilient than its stock price.

Reader Comments

John Furrier

February 26, 2008 11:44 PM

Rob,
Great summary and analysis. Super blog post.

I think that Google has been riding the PPC/CPC "gravy train" long enough. I'm bullish on Google to levels of $750 again.

However this big swing caught the general market by surprise for a few reasons:
1) click fraud benefits gone for Google - although some click fraud money lies around,
2) as you point out, their own innovation on the accuracy of clicks caused efficiency and took revs down a bit
and
3) maturing keyword buying market - how many more keywords can a Dell computer buy? This is big because more ad spend is coming online and how can PPC be saturated..hmmm Google needs new products and fast...hello YouTube and video adsense (except video adsense beta product got it wrong)
and finally
4) competition from social networks where adsense isn't dominant is eating into their core adwords and adsense revenue streams.

All these factor point to a shift but it isn't a proxy for online advertising in general. More dollars are moving online. How can Google be stumbling??

Funny, another story today was that iTunes is now the #2 music sales engine in the industry. Ironic on one hand people screaming at the bellwether Google - we're in a recession - yet on the other hand we have Apple knocking it out of the park.

I'd say that Google and Apple are the best Web 2.0 companies today and will stay around a very long time.

Prediction: After running my extensive analysis, and Furrier Series algorithm, it is easy to see both Apple and Google stock will double in next 18 month.

Long on Google and Apple

Shrevert

February 27, 2008 5:45 PM

The degree of decline in the stock is ridiculous:

* An economic slowdown might actually cause PPC spending to rise, as it is the most efficient form of advertising and companies would be inclined to concentrate budgets where they work best.

* As noted earlier, tightening click parameters results in higher quality clicks, which in turn results in advertisers being willing to pay a higher cost per click. The decrease in clicks and increase in quality (and cost per click) is almost perfectly proportional, making it a non-event.

* Google continues to expand its reach into other media and dominating the ones it already does. This trend is not going to reverse anytime soon, as the industry is a natural monopoly. The stronger they get, the easier it is for them to stay ahead.

* The Microsoft/Yahoo tie-up will damage their morale and whatever limited ability to catch up they had in the first place. When and if they finally combine, the new company will be so involved with integration that it won't do much to enable them to gain ground. Google is the most efficient ad platform for years to come... I don't forsee anyone threatening them for at *least* 5-10 years, if even then. Look at how long Microsoft's dominance in PC OS has lasted.

MM

February 29, 2008 11:50 AM

Yes Google has peaked.

Here's why:

1) Search popularity will hit a certain point and then decline as those who use the internet will begin to return to the sites they know and trust vs. searching for new ones.

2) Google's Big Brother practices and data collection of what its users are looking at and doing.

3) Better technology, better means for search (if and when needed) and increased competition with a lower cost of to entry into the market place.

4) Search results will get worse instead of better as marketers and spammers increasingly figure out how to place within the top 10 search results and people don't find what they are looking for.

5) PPC ads will also decline due to the amount of non-relevant content being at the other end of the click.

stuart

March 1, 2008 9:23 PM

Our industry began slowing in the 3rd qtr of 2007 and is off 25% or more during the 1st 60 days of 2008.

Recession is on for us. We are cutting online ppc since we've seen an increase in widow shopping.

People like to shop even if they don't intend to buy and this is not good for users of ppc.

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Bloomberg Businessweek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, and Douglas MacMillan, dig behind the headlines to analyze what’s really happening throughout the world of technology. Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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