Google shares falling from grace

38% slide tied to weak economy, uncertain online ad market

Google shares surged 6% on Monday even as more negative analyst reports surfaced.

Still, the stock is off 38% since posting a high of $747.24 less than five months ago, and the fall has some rethinking this whole Internet-advertising model, while others scream that — maybe for the first time — investors can pick up shares of Google on the cheap.

Granted, it's a small number in that first camp of skeptics, though there is precedent for such concern. In second-quarter 2000, online advertising was all the rage, bringing in $2.1 billion in the U.S. But it dropped the next quarter, and the quarter after that, to $1.8 billion as advertisers feared banner ads weren't effective and the value of search advertising hadn't yet been figured out.

The debate about banner ads rages anew. The trade publication Ad Age recently described serious "banner blindness" among Internet surfers whose eyes have been trained simply to ignore banners.

But Google makes the bulk of its cash with search advertising, so its stock slide presumably has more to do with the health of that slice of the industry. There, the concern is whether online search will be stifled by a weak U.S. economy.

Citing such considerations, RBC Capital Markets analyst Ross Sandler recently slashed his price target on Google from $675 to $530, the lowest of the 25 analysts who cover the stock.

Google perhaps thrives most when e-commerce is booming, though a slow economy already seems to be hampering the sector judging from comScore data. The measuring firm said that e-commerce growth has been decelerating: In third-quarter 2007, it grew 18% compared with a year earlier, and grew 16% in the fourth quarter. In the first quarter this year, growth was only 13%.

"Given the weakening labor trends, high energy costs and waning consumer confidence, we believe further deceleration is possible in 2008," Sandler said.

Google executives are on the record as seeing no impact yet from a slowing economy, but Sandler worries that by the time they do note such an impact, the stock might have fallen to where it would be too low to sell.

Other analysts also have cut their price targets for Google — some because of a recent revelation that the growth of "paid clicks" also was decelerating.

"The material slowdown in sponsored clicks is a serious concern, and the higher cost-per-click inflation is not sustainable," Oppenheimer & Co. analyst Sandeep Aggarwal said when he shaved his Google target last month from $715 to $600.

Those clicks were the subject of concern Monday again, as William Blair & Co. analyst Troy Mastin and Cowen & Co.'s Jim Friedland cautioned that search advertising data due out today from comScore might not be bullish for Google.

Friedland also expressed concern that Google's deal with News Corp.'s MySpace has been a drag, and he cut Google's earnings and revenue estimates a tad.

On the flip side, even the most bearish Wall Street analysts are predicting share appreciation during the next year — it's only a matter of how much. At the low end of $530, Google will earn 15% for investors based on Monday's close of $460.56, while at the high-end target price of $900, Google shares will advance 95%.

Google is still gaining market share. ComScore recently said that Google's search share in the U.S. in February was 59.2%, up from 58.5% a month earlier. But even there the news is mixed, as the number of Google searches actually dropped from 6.1 billion in January to 5.9 billion in February.

Worldwide — perhaps a more important metric considering that many countries are enjoying a better economy than the U.S. — Google's search share was at 62.8% in February, up from 58.5% in the same month a year ago.

More data that is bullish for Google is the fact that less than 10% of all advertising is done on the Internet, indicating plenty of growth ahead.

Research firm eMarketer is predicting that advertisers will spend $25.8 billion online this year in the U.S., 23% more than last year.

Perhaps the best reason to be bullish on Google is that it's downright cheap compared with other technology companies that probably aren't growing quite as fast.

On Monday, Google traded for less than 19 times expected 2009 earnings, while Yahoo's forward multiple was 50, Amazon's was 35 and Apple's was 22.
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