On April 17th, Google once again prevailed on Wall Street, releasing earnings reports that beat analyst’s estimates with force. Despite growing concern over the impact of the slowing economy on Google’s revenues & reports released by comScore indicating Google’s clicks were down for the fourth quarter of 2007, Google managed to increase revenues over 20% compared to the first quarter of 2007. Since analysts on Wall Street have become obsessed with Google, their success is worthy of brief examination.
Investor fears that online advertising revenues would fall are justified in the sense that advertising is usually one of the first expenses businesses cut out in times of economic woe. In addition, this is the first major economic crisis the engine has faced since its induction. You would think a business facing such a crisis would opt to bring in as much cash as possible. Not so. Instead of milking their advertisers for all they could, Google instituted stricter text ad policies that ensured search results were more relevant for the end user. By doing this, they decreased their potential customer base by barring bogus advertisers using irrelevant (or simply bad) web sites from advertising on their engine. On the surface, this is negative news for investors.
To make things worse, in February of 2008 comScore released a report citing Google’s paid clicks were down for the 4th quarter of 2007. The release successfully scared analysts & investors. Then, comScore came back out and said that the trend had continued into the 1st quarter of ’08. These two reports combined with fears about the impact of the economy on the engine’s revenues resulted in a 40% drop in Google’s share value from its peak in November 2007. In my humble opinion, these negative numbers only serve to glorify how successful Google really is.
Numbers can be manipulated to to dupe the unsuspecting observer. While I wouldn’t go so far as to say the analysts were duped, I would argue Google knew what it was doing the whole time. Despite losing a share of its customer base, the improvement in search quality allowed them to raise prices on worthy advertisers. In addition, Google’s expansion outside the U.S. has offset potential losses due to the slowdown here at home. As for the decreased number of clicks, a decline in growth does not mean loss. It simply means they weren’t growing ‘as fast’ as they did last quarter. There is a huge difference. While the long term effects of the economy, the DoubleClick acquisition and other affairs are yet to be seen; I think it’s safe to say there is no recession at Google so far.