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What’s the Effect of Google’s Panda 4.0 Update?

Google's (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) rollout of Panda 4.0 earlier this year was considered a major update to its search algorithm, an attempt to boost exposure for high-quality sites. While this change is expected to help Google's advertising revenue, it has also had a negative effect for many others like Expedia (NASDAQ: EXPE  ) and RetailMeNot (NASDAQ: SALE  ) , and that degree of effect might be rather significant.

The Panda 4.0 effect
Panda 4.0 officially made its debut on May 20 with the intention to connect users with better sites. Consequently, it's also believed to match better advertisements to users per search.

Source: Google

While it's very difficult to measure its actual impact in terms of advertising dollars, one can look at early data combined with previous sales trends to see that something had an effect on Google in the month of May.










Product Listing Advertising Revenue



According to ChannelAdvisor, Google saw a rather remarkable boost in several key fundamental metrics in the month of May, as compared to the year prior. Considering what might have been responsible for this acceleration of growth, we must acknowledge that Panda 4.0 was the company's key update, and that its effect might be greater than expected.

The wrath of Panda 4.0
While Google's update, unsurprisingly, had a positive effect on its business, it should also come as no surprise that other companies might be hurt by this update, especially those that earn significant business from Google search.

Specifically, RetailMeNot, the online coupon site, lost about one-fourth of its valuation at the end of May when a report showed that 30% of the company's web traffic had fallen since Panda 4.0's launch. As a result, further analysis showed that up to 10% of RetailMeNot's total traffic had been effected.

Clearly, this insinuates a disappointing quarter, and perhaps bearish long-term guidance, depending on whether the problem has been corrected. Yet, while RetailMeNot shares fell abruptly, larger companies like eBay are also nearing 52-week lows, due in large part to Panda 4.0 and a more consistent downtrend.

Furthermore, according to the same ChannelAdvisor research, eBay's same-store sales in Marketplace grew just 11.5% year over year in May. By comparison, Marketplace same-store sales rose 17.8% and 14% in the months of March and April, respectively, thus showing a rather sizable decline.

As most know, eBay is separated by Marketplace and PayPal, and it's very hard to make a fundamental conclusion based on just one-half of the known growth. Albeit, Marketplace has struggled for quite some time and it appears that Panda 4.0 has all but accelerated its problematic growth rates.

Where's the investment upside?
In regard to Google's strong growth in several key metrics, it's possible to imagine a handful of contributing factors. However, combining RetailMeNot's traffic struggles, Marketplace's same-store sales growth deceleration, and Google's gains, it's clear that the common denominator is Panda 4.0, and that it's playing some role in the performance.

Moreover, if Google's AdWords and cost-per-click growth is sustainable, investors can only imagine the stock gains that could be created because, after all, most of Google's business is still advertisements. As for RetailMeNot and Expedia, it might be best to sit on the sidelines until such algorithm problems are known to have been corrected, as these struggles could be long-lasting, given the fact that no solutions have been found, yet.

Foolish thoughts
With all things considered, eBay and RetailMeNot's struggles are problematic, given they are businesses that rely on search, meaning staying on Google is important. Therefore, this setback creates long-term reservations as to whether either are good investments, but in the process, further illustrates the power of Google, a company that can seemingly flip a switch and drive revenue higher.

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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