Google (NASDAQ:GOOG) is a global phenomenon. It’s hard to think of another industry in which the sector leader has such a large proportion of market share. But, there is a big difference between having market share and controlling market share. After all, internet surfing consumers are literally just a click away from trying a new search engine and last week that’s exactly what tens-of-millions of Americans, Europeans and Asians did. Some responded to the virus of banter circulating through Twitter, others obeyed the call of the North American TV marketing campaign. But wherever you looked you couldn’t escape references to Bing, Microsoft’s (NASDAQ:MSFT) glossy new attempt to secure pay-per-click revenue at the expense of the market leader. Early indications suggest Bing is securing up to a 15% share of the search market already. Investors in Google have another good reason to review the stock. It very recently completed a rare sequence of nine successive days of gains, from 26th May to 5th June inclusive.
Ok, I am going to summarise my initial thoughts and shoot from the hip before I dig deeper. A new product launched successfully by a powerful competitor with deep pockets, plus GOOG shares stretching deep into overbought territory, at least in the short term? Bing! I’ve got it. I’ll short it, at least for a day or two. (The GOOG price is $439.72 at the time of writing).
Needless to say, readers should gain a more robust understanding of the company and industry before making their own investment decision and a deeper look at the search engine market is as good a place as any to start that analysis. Google.com is literally ‘home’ for many of us. The search results page is split into 3 sections. The most prominent search results at the top of the screen are paid-for as are the narrow column of results on the right of the screen. The 3rd and largest block of results, dominating the screen, are a function of SEO (search engine optimisation). Google’s own complex mathematical internet screening process decides which websites are featured here. A SEO generated listing is free, though many firms now feel obliged to pay for a SEO expert to fine-tune their sites to maximise the probability of 1st page inclusion.
Google’s revenues are derived from the paid-for adverts, otherwise known as pay-per-click. Advertising companies generally pay from one dollar upwards for every click on their adverts in hope the site visitor, credit card in hand, will interact with their website and execute a transaction. This pay-per-click business model boomed over the past ten years as consumers increasingly stayed at home and bought online.
In America alone during April 2009 there were 14.8 billion searches. Google’s share was approximately 9.5 billion and market commentators suggest pay-per-click represents 6-7% of online searches. The revenue is enormous.
However there is a notable recent trend fighting against this secular growth, and a predictable one considering the global recession. Retailers are aggressively pursuing alternative marketing strategies, to save on click costs and capture customers in the fast-growing social media market. On Twitter, for example, clicks are currently free.
It should be no surprise therefore, to hear that Google has been courting Twitter for months and is keen to formalise a joint venture (presumably so pay-per-click ads can be introduced). Also, wisely, the search engine company is unwilling to leave its earnings growth prospects in the sole hands of its merger and acquisition team, and has been developing its own solution to the social media craze; Google Wave.
Such is the effectiveness of social networks and their ability to spread information globally, news of this soon-to-be launched hybrid of tools was common knowledge within Google’s target market within days of the press release. Wave, for those readers who are interested is such things, is a combination of email, instant messaging with additional social media and collaboration functionalities. The collaboration element allows colleagues in separate locations to build, improve and discuss a single document, simultaneously, with changes appearing live.
The question for readers is therefore; will the recession and Bing damage Google’s earnings more than the launch of Wave will add revenue, in the years ahead? To secure the answer to that question you need access to a rare analyst, someone who has a firm grip on global economic trends as well as a clear understanding of balance sheets and the corporate earnings process. They need to also have a deeply ingrained geek gene capable of anticipating the often fickle consumer response to yet another new internet tool, in an industry evolving by the week. The analyst would also need to be psychic.
In summary the industry’s future is so unpredictable any investment horizon beyond the very short term involves an uncomfortable degree of guess-work. However, in the very short-term, particularly if the recent market-wide rally fades, Google looks vulnerable to profit-taking and institutional shorting and is therefore a sell, at the current price, in my humble opinion.
Disclosure: The writer does not hold shares or other financial instruments that offer either direct or indirect exposure to any company mentioned in this article.