The surprise earnings release from Microsoft this morning was meant to ward off leaks on an already-down day. But Google Inc. (NASDAQ: GOOG) was the scheduled duelist against Microsoft for all of the media and headline attention in today’s afternoon round of earnings season. What will be interesting here is exactly how Wall Street evaluates the company’s commentary when you consider that it has never issued any formal guidance.
For starters, we know the expectations. Thomson Reuters(First Call) has estimates pegged at $4.95 EPS and $4.12 billion inrevenue. Be advised that the revenue is EX-TAC,meaning that "traffic acquisition costs" are taken out. Thatis how much the company pays out to its publisher and websiteadvertising clients for Google AdSense and other programs.
We have inquired about ad rates at Google’s competitors including Yahoo!, AOL and IAC. There are some pockets of strength, but in generalthe decline in ad spending is universal. Google also jettisoned itstest of print ads. The ad rates in page impressions and in CPM’s havecome down over the last 3 months. The good news is that we have seensome of that stabilizing and even some recovery off of lows, but wehaven’t seen any unilateral return to the rates seen as recently asSeptember and October.
What we, "they" and everyone else we have been able to find are tryingto tell you is that ad rates are down essentially in all segments.That means that even if Google continues its market share growth thatits relative unit comparisons are going to be down.
There is a caveathere. Google, Yahoo!, and others operate under a bit of a mysterypercentage model. That is not true on a general sense, but on anabsolute sense publishers using AdSense and websites who generate moneyvia the Google network frequently do not know how much Google keeps versus how much it pays them. If itwas universal this might be easier, but it is the mystery analysis andone of the key reasons that there are so many differences in analysts’earnings expectations. Some of the clients know the breakdown, but smaller ones do not.
Google shares currently sit right around $300. The companyis still a favorite of analysts, but not to the same extent as before. There is still a bullish bias from WallStreet analysts, and the average price target looks north of $430.00.That is more than 40% higher than today. Most analysts still havetheir Google pom-poms under their desks, but the flying colors are justno longer as bright when everyone was calling for $700 Google andhigher.
Options have nearly a month of time value, so the value of today’s newsis hard to use on an apples to apples basis. But taking thatconsideration out of the equation, options traders are using today’sexpected news to say that they expect a price move of up to $22.00 ineither direction.
The chart is nothing pretty. In this market, what else could youexpect. But it is also no disaster if you have not gotten in yet or ifyou are trying to figure out where the bottom might be. The good news is that the line in the sand seems to havebeen drawn in November when $270.00 seemed to be the key pivot level.On an absolute basis, the lowest intra-day reading was $247.30 and thelowest closing level was $257.44. There were only 4 closing prices inNovember under the $270.00 mark.
Here is where the analysis from analysts gets interesting. Google hasbeen able, until recently, to say it was unaffected the economic slowdown. It does not try to holdthat line any longer. But analysts are still looking for growth. Theestimates for all of 2008 are $19.33 EPS and $15.75 billion inrevenue. The bottom line has only come down $0.20 over the lastquarter for all of 2008. But in 2009, analysts expect annual earningsat $21.00 EPS and $17.5 billion in revenue. Analysts are looking for earnings growth of about 8.5% andrevenue growth of 11%. We are talking about Google, and we’ll be thefirst to admit that those levels are very conservative compared with thepast. But we are in a recession that is very deep, consumers arebringing down their spending, and businesses are bringing down theiradvertising. That is not good even for the Almighty Google.
Keep in mind that Google has been cut in half from its 52-week high.And in late-2007, this was a $700 stock. Much of the bad news hasalready been factored in. The question that lies ahead is whetherGoogle can keep its market share as high or growing, and whethereveryone in the world wants to go solely to Google.
Jon C. Ogg
January 22, 2009