Digital coupon marketplace RetailMeNot (NASDAQ:SALE) lost 25% of its valuation in the final two sessions of last week. The losses came following news of an algorithm change in Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Search that, consequently, caused a significant decline in traffic. While this has been significant to the stock short-term, investors should remember Expedia (NASDAQ:EXPE) as an indication for its longer-term implications.
What is Google doing?
Google didn't grow to a $380 billion company with annualized revenue growth of 26.8% during the last three years by simply following the market. Instead, Google has set the market, or at least the Internet space.
To remain competitive, keep its edge, and improve user experience, Google is always making changes to its core search technology. It's this technology that helps Google align advertisers with consumers and users with search results.
Specifically, Google rolled out Panda 4.0 on May 20, a component of its search algorithm that boosts exposure to high-quality sites. This particular update is believed to be more significant than many of the 25 Panda refreshes that have come before it. Many believe that several sites will be highly effected, but that advertisers and users will be more satisfied.
One company is deeply effected
On May 22, Search Engine Journal's initial analysis showed that more than 30% of RetailMeNot's traffic had fallen since the launch. RetailMeNot relies heavily on search to drive traffic, such as when consumers seek coupons to specific stores. As a result of this news, shares of RetailMeNot fell 20% in a single session, and in a company statement, it admitted a shift in traffic since the Panda 4.0 update.
With that said, Stifel's Jordan Rohan has already downgraded shares of RetailMeNot to Hold from Buy, citing its analysis that Google's update has created a 10% decline in overall traffic, and that there's no guarantee on how long this issue will last.
Putting this into perspective
While investors are always harsh to react to negative news regarding a web-based growth company such as RetailMeNot, it appears from these reports that some perspective is needed.
For one, if RetailMeNot has, in fact, lost 10% of its traffic since the algorithm change, we're talking about a matter of days, not weeks or months. Therefore, if the company corrects the issue quickly, how powerful of an affect could this news really have on long-term guidance?
Also, investors must remember that many of RetailMeNot's coupons or promos are not monetized (about 600,000 according to the company). Therefore, even if the site has lost 10% of its traffic, it's impossible to know whether that traffic is affecting monetized coupons or not.
Most importantly for investors, algorithm changes occur often, and companies tend to adjust promptly. To explain, think back to earlier this year when similar fears sparked regarding Expedia. In particular, Expedia shares slid from $70 to $63 in late January when the company lost 25% of its Google search visibility.
Supposedly, the reason for this loss was punishment for a paid linking scheme of sorts, therefore it wasn't a loss that could be corrected such as an algorithm change. Yet, shares now trade well over $71, and in the company's first-quarter earnings it reported revenue growth of 18.8%, while hotel bookings soared 24%, showing no deceleration compared to the fourth quarter. Hence, a short-term effect on search had few fundamental losses for the company, but Wall Street was notably spooked.
The bottom line is that, looking past today, Google's Panda 4.0 update is unlikely to have much of an impact on RetailMeNot. Thus, the question becomes whether the stock has value.
At 17 times forward earnings with expected revenue growth of 35% this year, the stock does, in fact, look cheap. Essentially, RetailMeNot lost one-quarter of its valuation due to the threat of losing 10% of its overall traffic for a period of days, maybe weeks. Hence, it's not a development that will likely create long-term headwinds, which, given its stock losses, might be the quintessential combination to create a value opportunity.
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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Google (A shares), Google (C shares), and RetailMeNot. The Motley Fool owns shares of Google (A shares) and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.