5 Reasons to Worry About Google

Save us, Google (Nasdaq: GOOG  ) !

The search-engine bellwether is now two days away from posting its fourth-quarter results. In the past, this would be a novel time for shareholders to start snickering. Big G would trounce Wall Street expectations, analysts would shake their heads, and the instructions were simple: Rinse and repeat every three months.

Unfortunately for Google, there are several signs of mortality as we head into this week's telltale report. If you haven't noticed the cracks, you're not paying attention.

1. "Search-engine marketing" is just fancy talk for "advertising"
Market watcher Efficient Frontier estimates that the country's search-engine spending fell by 8% during the fourth quarter, according to The Wall Street Journal. That marks the first year-over-year decline that has taken place during Efficient Frontier's watch.

The decline is understandable. If consumers are cutting back, then spending more money on them would be counterproductive. Users need to click on the ads to put some coin into Google's lead-generating coffers, and that doesn't seem to be happening. Consumers are too focused on the self-preservation of capital to go on ad-sniffing expeditions. There's also the possibility that ad blindness has kicked in, and proficient online users are simply bypassing Google's text ads.

2. Sorry, sir, but we're fresh out of pie
One thing worse than dealing with a shrinking pie is commanding a thinner slice of it.

Over the years, Google has been able to expand the market-share gap between itself and the likes of Yahoo! (Nasdaq: YHOO  ) and Microsoft (Nasdaq: MSFT  ) . Now the industry is taking a recessionary dip, and Google is bumping against the market-share ceiling. Efficient Frontier's report from 2007 showed that Google's share of search-engine spending grew by 8.6% to 76.6%. And that's essentially where Google finds itself today.

Is it all downhill form here? Online usage is going mobile, and that means bigger marketing opportunies for smartphone giants Apple (Nasdaq: AAPL  ) and Research In Motion (Nasdaq: RIMM  ) , and for rising Web browser stars such as Firefox and Apple's Safari. So forget about whether Google can make better inroads. Let's see whether it can even keep its market share intact.

3. It's a small, small world
The one caveat to the first two points is that Efficient Frontier's data is limited to domestic trends. Google bulls can point to comScore's (Nasdaq: SCOR  ) grim outlook for Google back in April, when the market watcher pegged the growth in Google's domestic clicks at just 2.7% over the past year. Google blew past those targets, probably in part because of the international exposure that wasn't included in comScore's forecast.

The rest of the world is hurting now, so even if Google gains market share on Baidu.com (Nasdaq: BIDU  ) in China and achieves healthy growth streaks in percolating markets, the faltering economies around the globe are unlikely to bail the company out this time.

4. The incredible shrinking guesstimates 
Like greyhounds chasing a mechanical rabbit around an oval racetrack, analysts have been on a relentless race to catch up to Google. Usually, the Internet star remained way ahead of Wall Street, with the pros left having to beef up their prognostications. Now there are more red flags waving than at a communist rally, and analysts have been going the other way with their bottom-line estimates.

Time Frame

2009 EPS estimate

Today

$21.10

7 Days Ago

$21.23

30 Days Ago

$21.52

60 Days Ago

$22.26

90 Days Ago

$22.65

 Source: Yahoo! Finance.

The problem with diminishing profitability is that a falling stock isn't necessarily getting any cheaper on an earnings-multiple basis if both the numerator and the denominator are shrinking. Google's stock has fallen by more than Wall Street's revisions, but the company's near-term growth prospects have also been tempered.

5. Something's missing 
Google believers may not mind that analysts are going the other way. The analysts have been wrong about the company for a long time, and besides, hosing down expectations makes it that much easier for the company to deliver an upward surprise.

But you don't want to fall into that trap. If analysts couldn't keep up with Google on the way up when they were jacking up their estimates, maybe they can't keep up with Google on the way down. Google has come in below Wall Street's guesstimates in half of the past six quarters. If you're into patterns, you'll see how Google has followed a miss with a win -- and vice versa -- in that span of time. After coming out ahead during the third quarter, pattern watchers may start getting nervous.

An optimistic close
Thursday is going to be huge for Google. It's priced for a weak report, and it has a laundry list of scapegoats to peg its potential shortcomings on.

I have no problem with Google as a long-term winner. It's likely to remain the online market leader, and the company's influence in other forms of advertising is already being felt and will be even more pronounced in the future.

However, when even the once-invincible Google is cutting off projects and laying off workers, it's practically writing Thursday's concession speech before your very eyes.

Other ways to approach Big G:

Microsoft is a Motley Fool Inside Value recommendation. Google and Baidu are Motley Fool Rule Breakers picks. Apple is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz wonders why everyone is hating on Google these days. Let him know in the comment box below. He owns no shares in any of the stocks in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (28)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 20, 2009, at 12:14 PM, madmilker wrote:

    scrubbing bugs tat spy on every user....what not to worry about...

  • Report this Comment On January 20, 2009, at 2:57 PM, SEManalyst wrote:

    Ad spending is falling, but because of what you wrote in Reason 1. People are still searching and clicking on ads, but they are not purchasing at the same rate that they used to.

    Therefore, advertisers are placing a lower value on these clicks and are willing to bid less (lower CPC). When everyone in the keyword market sees the same trend, they all bid down, so Google's revenue goes down. This isn't only happening on Google though, so expect the same trend on other engines.

  • Report this Comment On January 20, 2009, at 2:57 PM, SEManalyst wrote:

    but *not because of what you wrote in Reason 1.

  • Report this Comment On January 21, 2009, at 4:47 AM, dividendgrowth wrote:

    If GOOG can actually make 20 this year, it's strong buy buy buy at current price level.

  • Report this Comment On January 21, 2009, at 9:07 AM, jcatalano2310 wrote:

    The article has some merit in it's first point, but other than that it's off base. First off, Firefox is a mobile browser "rising star"? Have you ever seen Firefox on a phone? And what effect would Firefox gaining mobile market share have on Google? Last I checked, Google pays Mozilla to be the default search engine choice for the browser. That translates into more search searches, more ads delivered. Secondly, while they're right that people are "going mobile", last I checked Apple and RIM don't provide a search engine of their own, so these mobilites are still going to Google for their searches. More searches = more ad deliveries. That's precisely the reason Google's willing to give android away for free. Phone sales are a one shot deal. The recurring income comes from pushing ads out to every search request. I like the "Shrinking Guesstimates" argument too. If wall street predicts it, sure it must be on target. I mean seriously, when was the last time wall street made a bad bet on something?

    Bad economy or not, people use the internet. When they're at home collecting unemployment, they're using it even more reading news and trying to find a new job. We're a nation of gluttons, we're not going to give something up simply because our paycheck shrank. We'll just charge it. And as long as people are using the internet, they're going to Google for their searching needs. Just ask Yahoo and Microsoft about that.

  • Report this Comment On January 21, 2009, at 4:09 PM, seppensan wrote:

    I will not be divesting from Google PPC. Spending $5000 a month to stay ahead of the curve is well worth the end result. People will use the net for buying, recession or no recession. Businesses will still buy from each other. Consumers will still shop. In fact, it is easier and cheaper to use the net in this way. My business has been affected by the economy, as has most. However my inclination is to increase my spending in PPC rather than decreasing. Small to mid level companies have an enormous amount of growth potential when compared to their larger competitors. The smart ones use PPC to level the field, and it is a very effective strategy. As the big guys decrease spending, it makes it more attractive for us smaller companies to jump in.

    Back in 1999/2000 I laughed at all the people who said the net boom was over. Then net was not going away then, and it will not go away now either. People are simply not going to stop searching.

  • Report this Comment On April 09, 2011, at 5:47 AM, abubakerjalil wrote:

    i like your post it is very nice i found alot of information thanks and keep it up <a href="http://www.tajweedseeker.blogspot.com"> tajweed</a>

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