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How Low Can Google Go?

by: Erick Schonfeld October 07, 2008 | about stocks: GOOG    

Erick Schonfeld

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Tech stocks continue to get creamed this morning, led by Google (GOOG), whose stock is now officially a dropping knife (i.e., good luck catching it). Shares are down 5 percent so far today to about $353 (at one point they dipped as low as $350). That’s more than a $50 drop since Friday and the lowest the stock has traded since March 2006. The question on investors' minds: How low can it go?

Even though Google is the best positioned Internet (or media) company to weather a slowdown in advertising spending, analysts have started cutting back their earnings estimates for the company. As for overall ad spending, Barclays Capital is trimming its estimates for both overall and Internet ad spending. Total ad spending in the U.S. (including cable and broadcast TV, radio, newspapers, magazines, Yellow Pages, direct mail, Internet, and outdoor) it forecasts will decline 3.6 percent this year to $284 billion and then another 5.5 percent in 2009 to $269 billion. Of that total, Barclays is still estimating that Internet ad spending will grow 17 percent to $24.8 billion in 2008. But that represents a $1.4 billion haircut from its previous 2008 estimate of $26.2 billion. (It expects 2009 Internet ad spending to grow another 14 percent to $28.3 billion).

Although search advertising is most likely to hold up in the coming advertising recession, its growth rate is expected to slow down. Nevertheless, display advertising is expected to get the worst of it, which means less growth for Google’s DoubleClick business, but should hurt Yahoo, AOL, and Microsoft more. That’s why some analysts are still bullish on Google. In a note today, Barclays' Doug Anmuth writes:

  • Although we believe that online advertising will continue to benefit from the secular shift in advertising, we are lowering our 2008 online advertising forecast and our projections through 2012 given the current macro-environment, indications that a broader economic recession lies ahead, and the likelihood of sustained disruptions across some of the largest online advertising verticals.
  • In this note we highlight five current trends that we believe will shape the online ad environment going forward: 1) pressure on display, as expected; 2) platform launches following 2007’s acquisitions; 3) privacy issues impacting behavioral targeting growth; 4) the shift to performance pricing; and 5) rich media and video continue to outperform.
  • Overall we believe Search is the strongest vertical within Internet advertising due to its success based nature and focus on ROI, as such we continue to believe that the biggest beneficiary of growth in online advertising remains Google given its leading position in search and its multiple legs of growth over time including display, video, and mobile.

Despite his optimism, it’s not all good news for Google. Anmuth has search at 55 percent of Internet ad spending this year, display at 33 percent, lead gen/email at 7 percent, and classifieds at 5 percent. But next year, he has search losing three points of market share to the other sectors. Here is his revised ad spending model (click for a larger image):

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This article has 9 comments:

  •  
    Oct 07 01:17 PM
    SmartStops: Approach the market in what way? It was valued at a reasonable price in relation to their earnings growth.... It's not their fault everyone freaked out and started selling everything. Heck, they threw the house out with the bathtube, not just the baby. It was a better valuation than Yahoo, BIDU, etc... Yes, you're correct, people should utililze stops and protect thier profits, but to call their approach ridiculous isn't fair. What's happening now is ridiculous. The market, not their trading styles are ridiculous. Offer advice, not just negativity...
    Reply
  •  
    Oct 07 01:19 PM
    SmartStops,

    Just eleven hours ago, on the GE discussion thread, you were telling readers that 'One can only pick the bottom in hindsight'. Now you are telling people they should have picked the top on GOOG using your wonderful hindsight. Can you spell Hypocrisy?
    Reply
  •  
    Oct 07 02:05 PM
    Search is a-changing...look for more sites like iPoste.org to continue to expand and drill into online verticals....
    Reply
  •  
    Oct 07 02:07 PM
    but I thought GOOG was alwayssss a good buy..... haha.
    Reply
  •  
    Oct 07 02:11 PM
    Maybe Bush and Paulson can create a Google bubble...
    Reply
  •  
    Oct 07 02:44 PM
    Kris23: "but I thought GOOG was alwayssss a good buy..... haha"

    So true. I guess we might observe that it was always good buy if it was bought at $110. Perhaps there are still stockholders who bought at $110. What will they think when it is $50. Stranger things have happened.
    Reply
  •  
    Oct 07 02:54 PM
    Google is nearing its end of "internet life cycle".

    Advertisers are fed up, they have no grip on users other than goodwill and I'm sure the pampered employees are calling their helicopter parents whining about their worthless stock options. it could go the way of Altavista.
    Reply
  •  
    Oct 07 03:06 PM
    $328-330 looks good on the charts.
    Reply
  •  
    Oct 13 03:31 AM
    I just picked up Google at about $325 on Friday. So many investors are worried about the near term instead of Google's long term earning potential. For many, Google is the starting point to the Internet. As they expand into other areas and find effective monetization methods their earnings will skyrocket.
    Reply
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