Google Inc.
(NDAQ: GOOG) shares are down sharply today after new data from comScore
was released showing a decline in the number of web users clicking on
ads. The news prompted many analysts to cut their price targets and
issue warnings as the vast majority of Google’s revenues comes from its
pay-per-click program. However, others insist that these concerns over
overblown and that the technology giant will be able to quickly recover
thanks to stronger pricing. So, is this a time to sell Google stock or
simply a good entry point while shares are cheap?
Google’s AdWords program faces a variety of challenges going
forward. comScore reported that Google’s paid clicks dropped 7 percent
in January from the previous month and were relatively flat with the
same period last year. This is the lowest click-through rate since
comScore started reporting the data. Google had indicated some concerns
about paid clicks back in the fourth quarter, but blamed the slowdown
on technical changes designed to reduce the number of accidental and
fraudulent clicks by users. Some analysts believe that these technical
improvements should lift conversion rates and lead to stronger pricing.
Google also faces a variety of other issues related to its
pay-per-click business. Businesses bidding on keywords are quickly
finding that many of them are now priced so higher that they are just
breaking even upon conversion. This peak in keyword pricing means that
Google’s revenue growth will likely begin to slow as the
revenue-per-click peaks. Since this program accounts for around 90%+ of
the company’s revenues, this almost certainly will lead to slower
growth. Slower growth means a lower multiple, which means a lower stock
price despite the same earnings.
Google is also dealing with increasing fraudulent activity. Some
businesses are clicking on competition ads in order to raise their
marketing costs and reduce their conversions. A recent report by
ClickForensics found that 28 percent of all clicks were fraudulent,
which is up from 19.2 percent in 2006. This compares to an industry
rate of 16.6 percent, which may prompt some advertisers to switch their
campaigns to Yahoo Publisher or MSN Adcenter until Google can fix the
problem. However, it can be a hard problem to fix and so far Google has
just been refunding money to keep advertisers happy.
In the end, Google faces a variety of problems with its primary
source of revenues. The recent slowdown in paid clicks may be
attributable to a broader economic slowdown, but the reality is that
its other businesses will inevitably slow down as well. The stock has
already dropped substantially off of its high as investors slowly come
to this realization, but it may face further declines unless the
company finds a way to incease or diversify its revenues. Combined,
these factors make GOOG a stock worth watching!
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