Sitting Out the Great Google Debate

Includes: AAPL, GOOG
by: TraderMark

It s always so fun to watch analysts clash with each other; especially over a fan favorite such as Google (NASDAQ:GOOG). I've had a stake in this name since day 1one in the fund, but it's never been a large stake (usually 1% or less of the fund holdings). I've had an open question since last August how Google would react in its first full blown recession. [Aug 30: Google Can't Get Any Traction - is this Why?] Of course at that time no one said we were going into a recession. I mean even now we have a lot of holdouts.

After all everything will be fine "in 6 months"; unemployment is low and will rebound "in 6 months"; inflation almost nil and any inflation that there is will be gone "in 6 months", and the housing market will be back "in 6 months". Folks I just can't wait until we reach 6 months from now - nirvana! But let's assume nirvana is not going to happen despite CNBC's assurances. It would seem reasonable to a rational person that in a recessionary environment that consumers buy less.... and hence click on ads to buy things less... and hence corporations pay less for ads... and hence Google would suffer. Of course we are not in a rational world, but just saying...

The stock has been in bad shape, and unlike Apple (NASDAQ:AAPL) which I am constructive on, Google I still see no rush to get back in. Remember, despite all its prowess it is still levered to the domestic subprime economy - certainly far more than Apple (of course both could fall under the banner of consumer related). Even mighty Google appears to be getting dragged down by its heavy US exposure - shows you just how bad things are (err in theory, but not per pundits). 

We are seeing a slowdown in click thru's on their ads but if it's more macro economic or more change in efficiencies of ads is up for debate. But in a way, we don't really need to know "why" - we just have to respect the stock action - which is putrid. One could pick at bottoms here and expose themselves to further downside and/or months of sideways action or wait for a true turn up (missing the first part of the move).

In a general sense (always exceptions) I prefer the latter scenario. What I see with this data is uncertainty - and the one thing Wall Street hates more than bad news is uncertainty (this entire credit contagion is the best example of this). So at this point I am just sitting on my small stake and waiting it out... but in the long run I still like the Google - near monopolies are generally positive for an investors wallet over time...Analyst Spat

  • New data confirming slowing growth in Google Inc.'s paid clicks renewed debate Thursday on Wall Street over whether the Internet search company's revenue can quickly adjust to changes it made in how it generates clicks.
  • Citing data that comScore Inc. released after the market closed on Wednesday, analysts said growth in Google's click-through rate has nearly ground to a halt.
  • The click-through rate grew 3 percent in February compared to a year earlier, and January saw no increase compared to January 2007. Several months earlier, the rate was growing 25 percent to 40 percent compared to a year earlier. The new data is in line with click-through declines Google reported last quarter.
  • Google, which gets paid when users click on a sponsored ad that comes up as the result of a Google search, has reported steadily rising per-click revenue. The Mountain View-based company said in January that the drop in click-through rates is a result of its efforts to boost the usefulness of each click to its advertisers' sales performance. For instance, the company decreased the space around a word that would result in a click, so more clicks would be intentional.
  • Analysts disagree on how long it will take Google's per-click revenue to adjust to any increased value per click it has created.
  • Rob Sanderson, an analyst with American Technology Research, said per-click revenue will rise immediately if advertisers see more value in each click, because they'll pay more for them at auction. "It's not clicks that advertisers are really buying, it's what those clicks get them, which is sales conversions," said Sanderson.
  • "The counter point is that Google is out there saying, 'We are trying to make our clicks more worthwhile.' They want to actually deliver relevant hot leads to their customers because that's what their customers want," Gillis said
  • Piper Jaffray analyst Gene Munster predicted Google will fall short of Wall Street expectations in the current quarter because of the click-through rate. Lehman Brothers analyst Doug Anmuth cut his 2008 profit estimate for Google and reduced his price target to $580 per share from $644, citing the click-through rates.
  • He also said advertisers may be trimming their budgets -- and not responding to the changes Google has made.
  • Some analysts remain puzzled over whether it is the economy that is actually driving down Google's paid clicks as a result of advertisers scaling back on their spending, or if it has to do with the company's own efforts to fix problems with fraudulent and inaccurate clicks.
  • Fraudulent clicks come from advertisers clicking on the ads of their competitors in order to jack up their rates. Inaccurate clicks occur when users link to an ad that does not correspond with what they are looking for. Google has been trying to eliminate both of these, which may lead to fewer ads for the company but could also allow it to charge more money for higher quality results.
  • Jeffrey Lindsay, an analyst for Sanford Bernstein, says that while advertising spending is certainly feeling the impact of the economy at the same time as Google is trying to address its own problems, it is hard to tell which of the two factors will ultimately sway the company's revenue.
Disclosure: Long Apple, Google in fund; no personal positions