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.
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.