Okay, Enough Already

Google's quarter wasn't that bad.  And one point that popped out of that Time story was Larry and Sergey waving off a tiny site tweak that would have generated $80 million of incremental revenue because they thought it might annoy some people.

If the stock drops much more, it will be the Google guys who get annoyed, and if they get annoyed, they will presumably pull the trigger on a few of these short-term revenue accelerators.  Which could leave folks banking on an ongoing deceleration feeling woozy for a while.

At $345, the company's enterprise value has dropped to around $100 billion, or 35 to 40 times 2006 estimated free cash flow of $2.5 billion to $3.0 billion.  That's getting closer to a 30-40X range that seems reasonable based on what we know today.

Is there more potential downside?  Absolutely.  More deceleration could knock another 25% off the multiple, and this year's accounting changes and investments could make even $2.5 billion of free cash flow challenging.  And that's not even mentioning what would happen if the company was whacked by click fraud.

But there also seems to be some dry powder on the revenue side, at least over the short term, and I, for one, wouldn't want to bet that the company will never decide to use it.

Comments

[Ryan]

You know, I found this site and found the material on it pretty interesting. However, this article seems to be a turn of about 180 degrees to save some face with all of the folks who love Google. Why not maintain your stance if you think you are correct, why start changing the tune to sound more upbeat when previous posts have shown such a negative tone. Maybe I am missing something?

[Stuart MacDonald]

On the topic of Enough Already, Henry, why the constant drone about click fraud? Is there hard data to indicate the size of the problem? Have studies by credible third parties been done? Can anyone, anywhere, point to *actual* Big Money implications? As I see it, there is a definite reduction in the efficiency of this spend, and OF COURSE there is, but on the *evidence* and *logic* it is driven by (a) a natural tendency by major category players to spend to a level approaching breakeven on a gross-profit per transaction level and then question that logic and (b) irrational bidding at more than 100% of gross profit by those who, for whatever reason, are more than happy to pay that. Obviously, both of these things have colossal implications for both GYM and advertisers, but the whole clickfraud thing, absent categorical statements or evidence, is just getting a little old.

-- Stuart

[Sterling]

I'd like to see institutional and analyst sentiment sour a bit more before looking for an entry point on GOOG. It seems like even amidst the newfound media scrutiny of Google's recent earnings miss and accompanying stock price drop, nearly every morning I hear another analyst reiterating an 'outperform' or 'buy' rating and maintaining the same high price targets they had pre-Q4 earnings. A couple of times in the last few weeks that has given GOOG a temporary price bump, which has been met with selling into each rally. It doesn't look like the institions have fully scaled back their exposure yet, which I think may be necessary in order to see the next real strong rally in share price. Also, until the analyst community brings down their Q1 expectations and inserts some true fear into the hearts of investors, this one looks like it is sliding down a slope of hope with very nice symmetry to its price gains last Nov/Dec.

BTW- I don't have any positions in GOOG, but I am watching for a short-term bottom.

[Henry Blodget]

My concern on click fraud is that it could trigger a major change in sentiment. My understanding is that many online advertisers do not yet have mechanisms in place to really track and evaluate fraud and that, even if they do, the process by which they get money back is frustrating and cumbersome. Putting such mechanisms in place will be expensive, which will further reduce ROIs. And at some point, if the problem seems widespread enough, I could imagine many advertisers just temporarily throwing in the towel.

This said, there is no hard data. No one seems to know how big a problem it is or even whether it's growing or shrinking as a percentage of the pie.

[Henry Blodget]

With respect to positive/negative tone vis-a-vis the stock, it boils down to valuation. The market just burned off 25% of the company's market cap. 35X-40X FCF ain't cheap, but it's a lot less expensive than 50X-60X.

[Stuart MacDonald]

Bingo. Nobody really knows. But the imagery is scary (you hear these stories of warehouses full of people clicking on competitors ads, and the average person can wrap their head around Competitor A driving up Competitor B's costs just because, well, they can). So, absent real hard facts here, this is a *PR issue* for GYM, and apparently a big enough one liquify billions in enterprise value, and GYM are managing it miserably. And, frankly, those who are claiming it as a Big Issue should demonstrate evidence to that effect, just as GYM should demonstrate credible evidence to the contrary.

In the meantime, all concerned should be up nights thinking about the *real* issue, which as I've stated, is remaining efficient for the category leaders with the deep pockets (if it's not working, their money will walk, to the detriment of all concerned) and conversely praying for a fresh crop of irrational bidders to keep bid costs high and GYM flush with cash. Failure to balance either of those issues has the real potential to crater the business - and absent evidence, the rest is just noise.

-- Stuart

[bellerose]

Henry -
I enjoy your commentary/blog and perspectives. Good luck rebuilding your image! Just a quick question: Did you see the article in WSJ yesterday on GOOG/interest earnings contributing 1/5th to the bottom line? if so, could you comment on it and offer your stance?

thanks in advance
bellerose

[B]

While I still think Google has further to go on the downside, nothing ever gets to its final desination in a straight line. The options activity is starting to get way too bearish. I think we are getting to the opposite point of where we were a month ago on the long side with the bears getting too ballsy. Looks like they might get a healthy platter of their own pablum shoved right back down their gullet short term. Nothing is a guarantee. But this stock is way, way oversold even if it is eventually headed further south.

[Srinivasan]

We are at an interesting juncture in the history of online advertising. look around, and you can see signs of change slowly emerging. bloggers cribbing about adsense, models like word of blog, MDHP and adbrite - definitely, something is changing. omer kurdestani - are u listening?

time will tell, which model will work.

[Shaun Bourke]

An interesting comment about Google search.......

http://dissectleft.blogspot.com/2006_02_12_dissectleft_archive.html#114001243793660404

[Tel Aviv Guy]

Is google the only company out there ? I am reading this blog from the days it started and last couple of weeks its all google. Google is a very important company but the net has more than this to offer.

Alon

[Henry Blodget]

Agreed...fell into the All-Google-All-The-Time rut. Will try to diversify...