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Thursday, October 18, 2007

GOOG - Google Stock to $600 or $700 After Hours Today

Google (GOOG) is currently trading around $630 per share. It will announce quarterly earnings after hours today. If the results are in-line or below expectations, I think the stock will move below $600 after hours. If it beats, I think we could see $700. That'd be an 11% move - not that big of a swing, really, in today's volatile market. If the stock were trading at $63, would it be a big deal to say the stock could hit $70?

Now, why am I blogging about this? I think today's Google results will be a pretty good test of Steve Rubel's assertion that a pay per click recession is imminent. He declares:
For the last several years, search engine marketing has been on a tear. While the big advertisers sat on the sidelines in the beginning, they have lately been ramping up their spend on pay-per-click advertising, primarily on search engines but also affiliate sites like those that run Google Adsense.

However, I am calling a top to this market now. Here are five reasons why a pay-per-click advertising recession looms.
Wait a minute - a PR industry veteran is declaring the decline of PPC advertising? Perhaps this is simply wishful thinking. Is it arrogance or ignorance? He actually makes some pretty good points. The best response I've seen so far has been from Eric Frenchman:
Google, Yahoo, and even MSN will survive because they will make the acquisitions that are needed to keep going. I'm not ready to forecast doom for Google or search, not when there are still more advertisers to jump into the mix (small business and local merchants).
Let's suppose there is a recession in the economy at large. What will businesses (small and large) cut first - TV ads, radio ads, print ads, PR campaigns, SEO, PPC advertising, social media marketing? Somehow, I think it's going to be the most expensive and least trackable items or the newer, unproven options that will go. If anything, I think if advertising budgets shrink, the percentage of that spend that goes to search engines will actually increase.

Google's also in a unique position. They're increasing market share, expanding ad distribution efforts (mobile ads, radio ads, print ads, etc), extracting more pay per click fees from advertisers through quality score tweaks and expanded broad matching changes, extracting more revenue by increasing bids for top placement and figuring out how to monetize YouTube. I'll be curious to see if the earnings call indicates increased profitability from AdWords as well as increased revenues. I think the biggest drag on earnings could be from their hiring spree. Point is, I think Google is still at a relatively early stage in their growth cycle. They're also pretty efficient at squeezing a profit from their existing products.

At any rate, if GOOG drops below $600 today, I'll continue my subscription to Steve Rubel's Micro Persuasion blog. If GOOG does, actually, beat by a wide margin and manages to top $700 in after hours trading today, I'm calling a top to Rubel's influence and will unsubscribe.

Update (10/19/07): I think it's important to admit when you're wrong. I was wrong in predicting a large price movement in GOOG after hours yesterday. In fact, it barely moved. It actually moved more in pre-market trading this morning:
goog stock pre-market

Related Post:
GOOG $2000 Target by Henry Blodget

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4 Comments:

Anonymous Anonymous said...

You are missing one important item here, mate: when advertising budgets shrink, then the most expensive advertising options and the new unproven methods must go. I agree with that.

However, you should never underestimate the power of marketing. Google has virtually no marketing. They treat their advertisers like dirt. They don't do exciting events, they send gifts only to the largest advertisers. Uncool. Compare that to print and TV media - events and gifts galore. Nice. :-)

What's more, do marketeers WANT to be tracked? No, they don't.

I think GOOG is riding a bubble. The bubble may not burst this time, but it will happen. It's inevitable.

Thu Oct 18, 01:45:00 PM EDT  
Anonymous Anonymous said...

.

"At any rate, if GOOG drops below $600 today, I'll continue my subscription to Steve Rubel's Micro Persuasion blog. If GOOG does, actually, beat by a wide margin and manages to top $700 in after hours trading today, I'm calling a top to Rubel's influence and will unsubscribe."
_____________________

It looks like GOOG only traded to about $650 after-hours, so what was your decision?

I'll just comment generally on what you've said: You really have to evaluate Google's stock absent the advertising market, or whatever market they are selling into.

GOOG is a "hot" stock, most people trading it have little to no understanding about the details of the business they are in. If you conducted a survey of Google shareholders, I'd be willing to bet that a very large percentage of them couldn't tell you the difference between Google's AdWords and AdSense programs.

Google's market valuation -- its market capitalization; the price shareholders "value" the company at -- is "insane" if put in terms of normal business valuations and valuation methods.

If you were buying a business, would you consider paying 50 times earnings for it? Imagine a small business earning $100,000/year; would you pay $5 million for it? Maybe if you saw some fantastic growth potential, but what if that business was already the leader in its market? Wouldn't its growth potentials going forward be limited by its size in the current marketplace?

Additionally, would you be willing to pay such a price-to-earnings premium if the owners of that business wouldn't break down their revenue and income numbers so that you could evaluate the revenue/income in detail?

You asked before, how much of Google's revenue/income comes from the parked-domain networks. Did you find an answer? Some of us would like to know how much of Google's revenue came (and now comes) from the mortgage industry (there's been a bit of a crash in that sector of our economy you may have heard about)? Even though Google doesn't provide critical details such as these to potential investors, there is still no shortage of people willing to pay 50 times earnings for the stock!

Google's stock price can be better explained by studying the mass psychology of crowds than by trying to evaluate the advertising market they serve. This is true when Google's stock price is going up, and it will be true when the stock price comes crashing down. The valuation is not really about the business Google is in, it is about investor psychology in today's market.

There may be "events" in the advertising business, or in Google's revenue/income numbers, that will act as "triggers" to move the stock price up or down, but overall, most of the action one is seeing in a stock like Google is nothing more than the "emotions" of those trading it.

Fri Oct 19, 03:41:00 AM EDT  
Blogger Richard said...

Great comments, anonymous(es). ;-)

I was wrong about GOOG yesterday. Updated the post to reflect that. However, I don't think this is a bubble story. Unlike the dotcom frenzy in the late '90s, GOOG has solid earnings and solid growth. Yes, it's a momentum stock, but it still has the momentum.

I think if you compare the P/E of GOOG to its peers (AMZN, EBAY, YHOO), it won't appear over-valued. I bet it's actually cheaper on a PEG basis. All depends if you're looking at trailing P/E and growth rates or future results. Of course, the future results are just a guess. That's partly why I expected more volatility in the stock yesterday. Analysts would have been adjusting their future predictions based on this latest quarter.

I think today will be an interesting day for the stock. No, I won't unsubscribe from Rubel's blog. Was being a bit cheeky, there. Still, I do think it's ridiculous for a PR veteran to declare a "top" to the PPC market. Since Google derives 99% of its revenue from advertising (and most of that is from CPC traffic and not CPM traffic), it's arguably the best proxy for the PPC market. No recession in sight. Sure, some industries will cut back on spending, but others will jump in, particularly leading into the holiday season.

Fri Oct 19, 09:54:00 AM EDT  
Anonymous Anonymous said...

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Fri Oct 30, 04:19:00 AM EDT  

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