Google and Wall Street

It's amazing to me how poorly Wall Street evaluates Google. Yahoo says ad revenues are down, and everyone assumes that means trouble at Google, too. Despite the fact that Google's most recent quarter showed a 100% increase in revenues and profits over a year ago (Wall Street was predicting an increase of about 80% or so.)

Finally, analyst Rob Sanderson at American Technology Research tells Forbes that Yahoo may be suffering because of Google's success, not because there is a big downturn coming. Duh.

I don't understand why there is so much skepticism over Google's ad policy. Donna Bogatin, my favorite naive Google skeptic, is convinced that Google's auction system for advertising is doomed to failure. Advertisers are used to negotiating rate cards, but they have to keep bidding up Adsense ads. Soon they will rebel, she says, and go back to standard rate card models.

Nonsense. An auction does what no other form of advertising does--sets prices at true market value. If advertisers don't think they're getting value, they'll stop bidding so high. Further, they can measure the results through click-throughs, indicating that people at least see the ads. When I was in the magazine business, we all knew rate cards were a joke. They were priced according to the magazine's circulation, on the theory that every one of the mag's readers see every ad. It's inherently a lie, and inherently unmeasurable.

Google's percentage of the internet advertising market keeps going up, and the market keeps going up. Until there's evidence otherwise, this hypothetical "future revolt" is like speculating that Intel will start losing market share because some startup has a better chip design, even though there's no software for the new chip.

Nick Carr assumes that google has a conflict of interest because it sells advertising. That pressures the company to keep people on its own sites. In the first place, Google has always been dedicated to moving traffic to other sites, no matter what. It's the principle on which the company was founded, and is why the company never became a prtal like Yahoo, creating its own content and trying to keep people from leaving. In the second place, Google gets more ad revenues from AdSense than from ads on its own site. Again, quit the idle speculation and show me the evidence!

Google has the right model. It's working. It's a better alternative to anything else out there. My prediction: When Google announces next quarter's results, its stock will rise again. Unless Wall street finally gets a little sense and bids up the stock in anticipation of strong results.

Of course, the stock market must be fundamentally flawed, too. There are no rate cards.

Comments

[shel israel]

It's more fun to take issue with you Robert, but I think you are right on three counts (1) Wall Street doesn't understand that google is deflecting from Yahoo to it's own coiffures, (2) An auction is the purest form of marketplace transaction and Google is strong enough to break habits and (3) Nick Carr, as usual, just doesn't know what hes talking about.

[Piyush Pant]

Absolutely spot on in your analysis. The easy explanation for the periodic outbreak of scepticism is (in my view) intellectual laziness. Seeing any piece of information ( like Yahoo's results) as evidence of an industry wide trend is the path of least analysis and with the 2000 large cap wreck still in the collective memory, it's the easy conclusion to draw. As you say, there is seldom any evidence it is the case. Besides Google is defining industry trends not reacting to them.
That said, pervasive scepticism about the company based on no real data but general impressions and half-baked analysis from Wall street types is very good if you want to make an investment in the company :) Long may it continue !

[Richard Brandt]

My favorite stock anti-pundits are the folks over at Bloggingstocks.com. They keep insisting that google is over-valued. Sheldon Liber insists that GOOG is a lousy buy, even if it's destined to reach $1,000! http://goog.bloggingstocks.com/2006/09/19/if-goog-sinks-goog-stinks/
Why? The downside risk is too huge! All GOOG has to do is miss a quarter and it's stok will plummit, he says. True, but where's the evidence that GOOG will miss a quarter?

Google's results are solid. There are no shenanigans behind the numbers. It has shown strong, consistent growth for years. If it keeps growing at 100%, 80%, 60%, it is a good long-term buy. I had to take some profits out of my GOOG stock because I needed the money, but I plan to buy it back as soon as I can, no matter what the price.

The only risk in GOOG is the short-term. But if you're a long-term buyer, how can you lose by holding the stock for a couple years? If its profits are 2X or 3X in a couple years, where do you think its stock will be? Forget short-term. To me, GOOG is a long-term play. There's plenty of time to bail out if things start slowing. But then, don't take my word for it. I'm not a stock analyst.