Dear Google Bulls: Yahoo Comments Still Suggest Market Problem

Yes, Yahoo has Yahoo-specific problems, one of which is competition.  Some comments on the conference call, however, provide further evidence that the slowdown in advertising revenue is not just Yahoo-specific. 

When asked for the second time about whether the weakness was confined to autos and financial services--and whether the weakness was continuing--Sue Decker said this (transcript courtesy of seekingalpha.com):

We did say that we had seen some weakness in September in those two categories. Those sectors were meant as examples. They are having some industry-specific issues in both cases. We have seen a couple of -- several of the various sectors showing some of that, but we think those are specific to those sectors, and we do think those will continue into Q4.

Translation: We are seeing weakness in more than the auto and financial sectors.  The weakness is continuing.

The quick response from Google bulls is that PPC advertising is different, that advertisers view PPC as a "cost of sales" instead of "marketing spend," and, therefore, that a slowdown in general advertising won't affect Google.  I continue to believe that this argument is wrong. 

If advertising spending slows, it will slow because of weakness in consumer demand (which leads to lower revenue and, therefore, less money to spend on advertising).  Although it is true that you have to spend money to make money, advertising is usually one of the first expenses to get cut in a slowdown.  PPC advertising may be the last form of advertising to get cut, but it will still get cut. 

Why?  Because if consumers go from spending $1.00 on financial services to $0.90 on financial services, the ROI for any advertiser trying to attract that spending will drop.  As ROIs drop, weaker advertisers will reduce spending, which, in the case of search, will eventually filter into either keyword pricing (fewer advertisers competiting for the same keywords) or fewer paid clicks (fewer consumers seeking financial services).  The impact will not necessarily be disastrous, and it will not necessarily be as severe as it is for less-ROI-driven advertising, but there will be an impact.

Thus, I reiterate my prediction: Some of the weakness affecting Yahoo appears to be market-related, and if it is market-related, it will eventually affect Google. 

Comments

[New Troll in Town]

F U K T

[Victor]

Eventually, or this quarter? Let's have something concrete. Let's take a close look at what happens this quarter and then prognosticate from there.

The pattern every single quarter google has announced has been (bar one - mostly because of tax): GOogle is going to screw up this quarter. The wolf-crying reaches a crecendo right before earnings and then right after there's always a collective gasp - oh my god, they've done it again. It's happening now and it'll happen again at precisely this point before earninigs next quarter. Look back over the history of your blog posts and people's comments.

[Henry Blodget]

I don't know, Victor. I think Google has pretty much met expectations on the revenue side for the past three quarters and surprised negatively on the CAPEX side. The forward estimates for FCF haven't moved in nine months, and neither has the stock. The company is still posting very impressive growth, but there is no question that expectations have caught up with reality, and I would be very surprised if the company began astonishing people again (in part because it's now so darn huge).

Whether revenue growth hits a wall is a different question. All I'm arguing is that if what is hurting Yahoo is a market slowdown, it is going to eventually hurt Google, too (probably by Q4). And, even if the impact is slight, I think you're going to see additional multiple compression.

[walt]

I wouldn't characterize myself as a Google bull. Maybe just a person seeking truth!

>>EMarketer predicts Google will command 25% of U.S. online-ad revenue this year, compared with 18% for Yahoo, when certain marketing expenses are factored out. Both had a roughly 19% market share last year, according to the research firm. Google is scheduled to report third-quarter earnings tomorrow.<<

http://online.wsj.com/article/SB116109591333995174-search.html?KEYWORDS=yahoo&COLLECTION=wsjie/6month

[Chris Fischer]

Walt,

Google has been growing revenues over the past year - Yahoo really hasn't (much at least.) The above is obvious - looking at the revenue line of the income statement for both companies could have extracted that information. It's isn't new.

[Vic]

Everything is fine and dandy Henry but the fact of the matter is, Google is cheap. They are going to do close to $10 EPS this year and $13 next year. Slap a conservative 40x PE on that forward and you get $520. Cheap I say, cheap.

[Henry Blodget]

Yes, but a year is a long time, and that "conservative" 40x multiple will compress to 30x or below if there's any hint of a slowdown. If there's a real slowdown, moreover, next year's $13 could be $12 or $11 (or $2, if for some reason, we saw a repeat of 2000). And apply that 40x multiple to 2006--which, at this writing, still represents a "forward" number--and you get $400. So if you're right and the company nails the next 6 quarters, prints $13 for 2007, and trades at $520 a year from now, the question is whether a 20% increase is adequate to compensate you for at least a 20% downside risk. If yes, you're happy. If not, you're on the sidelines. I own the thing in an index fund, so I hope it goes to the moon, but I wouldn't be surprised if it were trading in the $200s next year.

[cris]

Henry,

is your argument dependent on a slowing economy? as far as i can tell there is no real slowdown exept in the housing market. For example ETN just reported huge numbers.

[Chris Fischer]

I'd like to add - sorry to be the old man of the group (in my ripe old age of 26) but when it gods name did a multiple of 40 become "conservative"?

[Piyush Pant]

Henry,
I find your argument rather silly.

It seems to go something like this..

IF there is an unexpected slowdown in the market and IF that impacts google THEN the stock will take a hit..

I think that's stating the bleeding obvious. You can make that argument for virtually any company.
However, you don't show any convincing argument about why you expect google will see a soft quarter. Yahoo is not reason enough - yahoo has had soft quarters for a while and over the years its performance has never predicted google's and there is no reason why it should do so now.

[Cris]

Can I just add that Henry never bought google stock. How is it possible that he didnt see this company as a buy when it started to report monster quarters? We need a google bull to go negative on google before we even consider taking action on the stock. I dont see any change in Henry's view here. He continues not to believe.

[Chris Fischer]

piyush-

Actually, I think your argument is silly. The main argument I hear from the bulls is that "Google is the greatest stock/company of the century, no price is too high, and even though advertising is one of the most cyclical industries on the planet, google is immune from all downturns."

Henry's argument seems to me that this is a company that is very exposed to recessions - like ALL advertising, travel, auto manufacturers, etc., and maybe assuming as a given that they'll continue to beat expectations and add 3 billion in revenue in the next year as a given is.. premature.

[Chris Fischer]

Also, to add "I think that's stating the bleeding obvious. You can make that argument for virtually any company."

Not true at all. There are defensive industries (insurance, food, beer..) whose performance isn't as reliant on the overall economic picture like advertising is.

[vic]

Chris F, if you are old, I'm a grandfather. 40x is conservative when the stock is showing 90% year over year growth as it will this year.

[Piyush Pant]

Chris,
I am not a Google Bull so not sure your criticism is well directed. I am just pointing out a flaw in the argument that Henry is putting forward.
I do happen to think that Google - priced at 30x 2007 earnings - is not grotesquely overpriced.
One has to look at hard facts while evaluating companies and Google's story so far is one of excellence in execution. Nothing that has happened so far suggests that the company is underperforming yet I hear constant bleating about how the sky is just about to fall on our heads. I've been hearing this ever since Google went public and it has always been wrong.

[Victor]

I want to reiterate that Victor!=Vic, although he seems to be a bull too. Henry your point about FCF is well made, and I'll be very interested to get a look at that line this Q.
Hold onto to your hats, it's gunna start in a couple minutes!

[Piyush Pant]

A blockbuster quarter - up $30 in after hours.

I rest my case.

[JC]

Yahoo needs new blood at the helm.... it's as simple as that. The difference in execution among the two companies is, in a nutshell.. just sad.

[ha]

Hi, Henry: Is that you :)

[Joe]

HENRY,

Yahoo does indicate a slow down, BUT we can not igore the fact that YAHOO is commanding LESS users, hence command LESS ad dollars.

Yahoo's problem is MySpace, and (i thought i would never say it, but) AOL (!?!:)

Of course the economy is slowing down, and is mostlikely contributing to YAHOO's problem. BUT the real problem is their users are spending less time there.

imo, sell ur yahoo shares and buy GOOG or even TWX or NWS.

ps. GOOG is also a company grabbing ad dollars away from all the traditional sources (even internet banner ads) that typically see the slowdown first... IN OTHER WORDS, goog will not see the slowdown first. (as the report suggests)

[Victor]

Ha! I knew it. I nailed it henry. 1.86 and after market of $450. Now, if you'll give me a moment to trumpet my triumph :)

[walt]

Hey Chris,
feel free to ignore my posts if you don't agree or if you think what I say is obvious and adds nothing.
If my pointing out that GooG is estimated to increase market share by 30% this year in a market that has shown phenomenal growth in the past few years, is obvious; then your argument should be directed at Henry, not me (see thread subject title).
Maybe I'm confused. Is the contention here that recent phenomenal internet advertising growth has suddenly ground to a halt at a time of RECORD corporate profits?
If you want to be useful, tell me the increase of internet advertising over the past 2 years, 1 year, this year!

[Robert Scoble]

Henry, still think us "online advertising bulls" are wrong? I think you're wrong and wrote why here: http://scobleizer.wordpress.com/2006/10/19/google-proves-advertising-industry-is-quite-robust/

[fsjioi]

大众健康的博客 关注肝癌 儿童排铅 健康网的blog 肝癌浅谈 生命健康疾病 健康无敌 有健康有快乐 牛皮癣博客 人与疾病 生活健康咨询 关注胃癌 共同预防疾病 关注肺癌 关注健康 关爱生命 悯泯之音 黑色幽默 心静的白话字 最后一口 我爱电影 我爱电影 想想未来 喜剧不俗 尘埃博客 秋菠太老博客 乒乓博客 唐诗博客 免费手机铃声

[Lee]

It is funny that not a single analyst mentioning the over $1 B receivables Google has in quarter ending Sep. 06. Are they that ignorant or they just wanting to hype the stock up so they can sell and get short before downgrading it for that reason? I think the later. Google is playing its books and Wall Street is trying to suck money out of retail investors.