Yahoo and Google Earnings Indicative of Unhealthy Reliance on Online Advertising (GOOG, YHOO)

Yahoo (YHOO) just reported disappointing Q3 earnings after today's market close and with Google's (GOOG) Q3 earnings coming in on Thursday, we expect to see them report some softness in online advertising revenues and earnings as well.

Why so negative on online advertising? Isn't it growing like gangbusters?

Yes, and that's the problem. As the Wall Street Journal notes today (sub. req.), nearly everyone in Silicon Valley is launching businesses dependent on advertising, so there's a glut of online advertising supply. And at the same time, our most recent report of US business marketing spending shows that companies have cut back dramatically on their online investments over the last six months. The result? Let's just put it this way: Oversupply and decreasing demand is not going to be good news for the companies dependent on advertising revenues for profits.

In May, we predicted that this glut of media types competing for limited consumer attention was going to have a negative effect on most media companies. We also tapped Google as one of the few survivors because of its single-minded focus on branded content as an advertising vehicle. But that doesn't mean that the decline in advertising prices is going to be fun for the companies involved, Google included. And with the whole Web 2.0 bubble being fueled by Google's willingness to blow $1.7 billion on a company with no significant revenue stream, I see the froth still building in new media markets. Don't be surprised if this week's earnings from Yahoo and Google start popping some of those bubble valuations.

Full disclosure: I have no positions in either Yahoo! or Google.

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[kkin365:]

Last quarter, YHOO's loss was GOOG's gain? Why not this quarter? omooc

2006 Oct 17 08:54 PM