San Francisco: Are Internet users clicking on fewer Google ads and putting the company’s growth prospects at risk?
That question is weighing on investors, who have cut the value of Google Inc. shares by 38% since they peaked at $747.24 in early November.
The slide continued on Tuesday when Google shares dropped 4.6% to close at $464.19, as investors were spooked by a research firm comScore report that said clicks on Google ads in the US were flat in January compared with a year earlier.
In all, Google’s shares have fallen $283 from their peak, wiping out $83 billion in market value and bringing an aura of vulnerability, at least on Wall Street, to a company that just four months ago seemed unstoppable.
Ad slump fears: Eric Schmidt, chief executive officer of Google.
Investors have focused with new intensity on Google’s paid clicks, which grew at 30% in the fourth quarter, because the search giant earns the majority of its revenue from text ads, for which it is paid only when users click on them.
Many analysts saw the comScore report as the clearest sign that Google is not impervious to the slowdown that is buffeting the US economy.
“There are pretty strong signals now that the economic slowdown is having an impact on consumers’ behaviour online and therefore having a negative impact on Google,” said Clayton Moran, an analyst with the Stanford Group.
Wall Street analysts say that in addition to concerns about the economy, the company is facing a growing number of questions that are weighing on its shares: Has Google gotten so big that its ability to gain further market share is limited? Is its spending out of control? Will it face stronger competition if its two chief rivals, Microsoft Corp. and Yahoo Inc., end up merging?
For now, however, Google remains a highly profitable firm that is outpacing all major competitors. Its share of the fast growing online advertising market in the US increased to 28% last year, from 19% in 2005, according to eMarketer, a research firm.
And even some of Google’s biggest critics are reluctant to bet against it in the long term. “Everything wrong with Google’s stock is self-inflicted,” said Scott Cleland, an analyst at the Precursor Group, who testified before Congress against Google’s proposed merger with DoubleClick. Cleland said the most recent quarter, when Google’s revenue grew at 51% while profit rose only 17%, was the latest sign that the firm was overspending. “If they cut spe-nding a little, so that they cou-ld start gaining earnings momentum again, their stock valuation would return,” he said.
Others point out that the unexpected weakness in “paid clicks” may be the result of deliberate actions taken by Google that may benefit it in the long term. “I think at least half of it is self-inflicted,” said Jordan Rohan, an analyst with RBC Capital Markets. Rohan noted that Google had reduced the clickable area in text ads to avoid accidental clicks, which earn it revenue but are of little value to advertisers.
In recent months, Google has taken other measures to improve the usefulness of its ads. For instance, it ended contracts with websites whose sole purpose is to carry ads as those ads tend to deliver poor results for marketers.
Many sophisticated marketers base their search advertising budgets not on the number of clicks they receive, but on the value those clicks create in terms of purchases or sales leads, said Marianne Wolk, an analyst with Susquehanna Financial Group. If Google weeds out low-quality clicks, advertisers may be willing to pay more for clicks, Wolk said.
“Google has this history of making major changes to the platform that have had terrific impact on monetization,” Wolk said. “Given the track record, we will give them the benefit of the doubt.”
Others went as far as to que-stion the accuracy of comSco-re’s report. During a 31 January conference call, Google chief executive Eric E. Schmidt repeatedly told investors that the firm had not been affected by the economic slowdown.
Derek Brown, an analyst with Cantor Fitzgerald, said investors appeared to be overreacting to comScore data. He noted that while Google’s share decline was significant, other tech stocks that climbed sharply in 2007, such as Apple Inc. and Research in Motion Ltd, were also down sharply.
Google’s rate of growth has slowed markedly in recent years, from 92% in 2005 to 73% in 2006 and 56% last year. Growth in the fourth quarter was 51%, slightly shy of expectations. While many believe that the slowing trend is inevitable given Google’s growing size, others worry it is happening faster than anticipated.
“The fourth quarter didn’t show the company’s growth falling off a cliff, but it did show a slowdown,” said Moran, of the Stanford Group. “This is a high-flying stock that trades a lot on momentum, and the momentum has turned decidedly negative.”
©2008/The New York Times