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Citigroup Internet analyst Mark Mahaney raised his estimates for Google yesterday based on two positive data points. Excerpt from his note to clients:

GOOG: Modestly Raising Estimates for Google Based on Monetization Trends

We are modestly raising our revenue and EPS estimates for Google based on recent monetization datapoints. The specific monetization datapoints we are focused on include the August addition of a third paid link to selective Google search results and the yesterday released comScore search data for July. The takeaway -- click-thru rates for Google appear to be rising faster than anticipated, which boosts our revenue estimates. While we had expected flat- to low single-digit Q/Q improvement in click-thru rates for September, datapoints point to a mid-to-high single digit increase.

As background, we note that of the four key drivers of search revenue – queries, price per click, coverage ratios, and click-thru rates – click-thru rates have arguably been the hardest to track. Companies have not disclosed these, and third-party measurement services have only recently been able to track them (with the precision of this tracking hard to prove). Like those friends of ours who look for lost keys near street lights – as opposed to in dimly lit passageways where they are more likely to be – we and the Street have probably overly focused on query growth and price per click surveys. Now, as the click-thru datapoints have become clearer – and channel checks have increasingly emphasized the importance of this driver – we have expanded our focus on click-thru rates.

In August, Google began selectively adding a 3 rd sponsored link on top of its organic search results. Recently, management publicly disclosed that it was doing so with what it viewed as the most commercial of searches, e.g. laptops, hotels etc. We conducted a quick and not very scientific100 key words search survey in various categories and found that 40% of the results appeared with three sponsored links on the top of the result page, followed by 39% with two sponsored links, 12% with a single sponsored link, and 9% with none. Our clear expectation is that this increased linkage should raise click-thru rates – a conclusion we have checked with industry sources.

Further, comScore published results yesterday that highlighted the improvement made by Google at Google.com and Google Networks. In Q2-05, Google.com and Google Networks had an average paid search click thru rate of 18.5% and 18.9% and for the month of July ’05 these rates touched 19.3% and 19.6%, an improvement of 4.3% and 3.7% from Q2-05 rate. And this was before the introduction of the third link. Given this data and the emergence of the link, we believe it very reasonable to assume that click-thru rates for the full quarter will raise in the mid-to-high single digit range – vs. our prior assumption of flat-to-low single digit growth. Hence, the increase in our estimates.

Related:

  • All Internet Stock Blog articles on Google.
  • Other Internet Stock Blog articles that mention Mark Mahaney.

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Source: Google Ad Click-Through Rates Rise From 18.5% to 19.3%, Citigroup Raises Estimates (GOOG)