Interesting results. I've remarked in the past how the decreasing CPC numbers were being papered over by creating massive amounts of inventory (more ads per page to click on) and paid click growth has largely been facilitated by adding distribution "partners" which is code in the search business that shove traffic your way. Early on in Google's history it was all organic but this last quarter they were spending nearly a billion dollars a quarter to have people send them traffic. Looking at the numbers for the last 12 quarters its like this:
Who would have thought between Microsoft and Google that sending search traffic artificially to a search engine would be a > $4B/year business? I don't think it is sustainable long term.
That is exactly how I look at it. If they showed no more ads, and got no more searches than the previous quarter, the drop in CPC would be a drop in revenue. But since the increase both ads shown, and buy more traffic, their overall revenue goes up. The question then is when can they not show any more ads (the page is totally ads) and when can they buy no more traffic (everything additional they try to buy is the really crappy robot stuff that comes from some randome armpit of the Interwebs). Then the equation flips, their CPC drops, their searches increase (and costs increase), and they get no more paid clicks than they did the previous quarter. At that point adding money just causes them to reduce profits and they have to start riding the CPC loss down. Given the increase in paid distribution this quarter over last quarter and a loss of 1% in paid clicks, I'm interested to see what next quarter looks like.
If they follow their trends they should pay about 917 to 988M$ for distribution traffic. They will need to get at least a 25% increase in paid clicks over Q2 of last year which would be something like an increase in 5 - 6% in paid clicks over this just finished quarter. If they can't do that then they are going to miss their targets again next quarter. My guess (well what I would do if I were in their shoes) is that they would take it out of the members cut, basically reduce the payout to AdSense for Content and other member sites. Either way, interesting times ahead.
Well at some point they're limited to the rate of organic growth of the internet. If Google gets $X per internet user then they're going to only grow as fast as the internet grows.
I believe they hit that limit several years ago, hence the 100% annual growth rate in what they are paying to buy distribution traffic. My thesis is that they are now in the $X per organic user + $Y = ($Q - $D), where $Y is the amount of money a nominal 'purchased' user brings in ($Q) minus the cost of getting them ($D).
> Who would have thought between Microsoft and Google that sending search traffic artificially to a search engine would be a > $4B/year business?
Many toolbars make all their money that way. Ask Partner Network, Conduit. Mozilla makes their money this way, in fact I bet a huge chunk of that cost you see there is the Mozilla deal worth hundreds of millions of dollars.
I am really curious if they consider the money they pay to support the Mozilla foundation as "paid distribution." I could see how it would come out like that, but I could also argue from an accounting standpoint that it should be part of the 2.39B$ they paid to "Network Members". It might be a good question for their next earnings call though.
Yahoo (aka Bing since all their search traffic is handled by Bing at the moment) also spends heavily on acquisition. We (Blekko) did too for a while (although we could never afford to pay hundreds of millions of dollars doing so), there are a lot of people who will sell you traffic. The interesting take away is that search it not nearly so differentiated as it once was. That is hurting CPC (16th straight quarter of declines for Google) and it is hurting loyalty. Lots of people on HN for example use DDG as their search page. That is a huge change in the search business and a source of worry for Google (as the leader) and a source of hope for people breaking into the market. As search becomes commoditized, Ad CPC becomes a race to the bottom. That doesn't bode well for a company depending on Search Advertising to fund multi-billion dollar investments, per quarter, in data centers and other infrastructure.
Its kind of like watching the Pacific ocean erode the cliffs along Malibu, slowly but surely really pricey real estate is turning into tide pools.
Well that may be true, but unbiased information is just not available in commercial settings (even the government "which solar panel is best" information is politically influenced, plus it doesn't even list correct pricing). I usually book hotels on kayak, but what hotels are listed there ?
The ones that pay 5% of the booking price to kayak.
Face it, without commercial incentives you'd never get accurate pricing, making finding the cheapest hotel VERY hard. Finding a 5% cheaper hotel costs me the better part of the day, and that will generally be worth far more than the 5% of the price that I might save (ie. 15-20 bucks). Also, sites like kayak may not get volume pricing, but they do seem to get lower prices than I can get myself.
What did you expect? The VAST majority of people who type "london hotels" are looking to BUY a hotel room in London for the night.
Try a search like "Albert Einstein". No ads.
Are you doing research on hotels in London? Then you'll need to add some more keywords. Google Search is not setup specifically for London hotel researchers.
The VAST majority of people who type "london hotels" are looking to BUY a hotel room in London for the night.
And extremely expensive ads are the only way to help users???? The advertiser and Google don't have the user's interests in mind.
>>Then you'll need to add some more keywords. Google Search is not setup specifically for London hotel researchers.
Of course not, because this was is more profitable to Google. They'll change the setup and display to increase their profits when necessary.
I love the title. As far as I know, it's the forecast that missed the reality. When the weather is not as planned, it's the weather service that missed, not the sky. It was not an engagement form google.
It's incredible how twisted some vocabulary has become. What do they say when they forecast on agricultural prices and the actual weather influenced the production? corn production missed the forecast?
Er, yes? "Corn yields fell short of forecasts" is a common phrasing. "Temperatures failed to reach record highs set in 19xx despite the longest heatwave since records began" is another type of thing you'll see.
that's just wonderful. I'm still debating between Wes Anderson/Bill Murray or Tim Burton/Johnny Depp to shoot a movie where those sentences would be uttered.
The reason it is phrased this way is because when a company misses forecast this usually results in the selloff of stock. This is generally the primary focus of earnings report reporting: the direction of the stock price.
I think that is also one of the reasons why public corporations are so heavily influenced by Wall Street in their decisions, and why they strive to reach certain quarterly goals in order to "meet the forecasts". If it was reported more like "forecasts miss the revenue", I think companies would be under less pressure from Wall Street to perform "at least as well as the expectations" every quarter.
I'm not sure what the phrasing of the reporting has to do with anything. It's an effect not a cause. The pressure from Wall Street is due to, well, the pressure from Wall Street. If analysts on Wall Street form a consensus around a company's expected earnings, then the market will price in that consensus. If that consensus turns out to be wrong, the market will (in theory) adjust accordingly.
In other words, if analysts are (in retrospect) over-optimistic, the stock temporarily becomes mis-priced and expensive (relative to an unknowable reality at the time) until the earnings report. Usually these analysts' look to the company's guidance (edit: or in google's case, the lack thereof) in forming their valuation. Add it all up and it's hard to see how there is pressure on a company to beat expectations, since they have the ability to set conservative guidance and try to get analysts to come to a consensus that is in line with the numbers that actually come up. If the company is performing poorly, they either depress the stock price in advance (under promise, over deliver) or later (over promise, under deliver) but regardless of when this happens if you buy into the EMH the stock is always trading at the proper value, behavioral economics notwithstanding.
For an example of an exception to this rule, see AAPL which routinely beats estimates yet sells off. One theory is that there is such latent fear that Apple is losing its mojo, each earnings report is a reminder that their growth doesn't compare to the old days, so investors flee despite their return on capital being extremely competitive.
Google's probably under less pressure than many companies because the dual-class stock structure makes them immune to takeover attempts.
I think a lot of the problem is that the stock price has many spillover effects. Recruiting & retaining employees is much harder when the stock is in the toilet. There's less currency available for acquisitions. It slants everything the press says against the company.
There was another story on HN today about how Marc Andreesen was dying to fund something that disrupts the financial industry. This is probably a major reason why: they wield disproportionate power based on made-up numbers.
Ah poor Marc, he only deals in real numbers. Wall Street is what it is but generally you can tell them don't expect much growth in the next 4-5 years and they'll adjust their expectations and share price. Coca Cola has a very different PE from Amazon and Google for example.
Just classic marketing psychology, of the "stopped beating your wife yet?" variety. By pondering why Google missed the forecast you automagically dump the blame on Google instead of the shitty forecast.
Vocab is hardly more twisted now, though; journalism has always chosen its words deliberately.
> As far as I know, it's the forecast that missed the reality.
I believe what you are inferring is a called "prediction", not a forecast.
> It's incredible how twisted some vocabulary has become.
Context is everything. Let me try to simplify the financial terminology:
A company forecasts it's key statistics based on the internal finance team (for revenues, they'll work with sales to validate this for example). The market dictates the price of the stock based on the growth potential of the company. Stock price is a reflection of a firms ability to both grow (revenues) and control growth (forecasting). In other words, as an investor, I'm more likely to buy stock that is both predictable (rather, that it's forecastable) and has growth. In this specific case the forecast was incorrect, and thus they are being penalized for it.
This is also why P/E ratios are so high for tech companies because their growth potential is generally seen as much high than non-tech. In other words they scale much faster than non tech.
In Google's case, they make up numbers based on any publicly-available estimates of Google's business drivers they can find - traffic, CPC, etc. Google doesn't provide earnings guidance.
The forecast is not made in a vacuum. In fact, Google's management has a lot of input into the process through guidance. I understand that there is no explicit agreement from Google to hit the forecasted numbers, but from another perspective, the shareholders have put out goals, and Google missed them.
It's analogous to a salesman failing to meet his or her sales goals. You don't (typically) say that the sales manager missed the sales estimate. On the other hand, if the sales manager (or in this case the analyst and shareholders) DOES give Google an unreasonable goal, you have the option to bet against the poor analysis.
Yeah, but at the end of the day it doesn't matter.
Stocks are priced based on the expectations of the company's future value. If the expectations were wrong, the price is wrong, and needs to be readjusted. It's not a matter of blame.
the problem is that while their revenue grew, their costs grew faster than their profit. can mean a lot of things of course, but most simple explanation is that it is becoming more and more expensive to grow, hurting bottom line.
Forecast is created by company employees, based on what they know and the company plans. It's not just sticking your thumb in the air and guessing what tomorrow will be. So yeah, that's called "missing the forecast", and it may be because your forecast was not accurate (too optimistic), or the company did not perform as well as expected (stuff happened that made it hard to meet objectives).
Ultimately, they use financial analysts for the annual reports, but these analysts don't make numbers out of thin air, they are using the data generated by Google on their current activities and their own forecasters' expectations. Big banks analysts do not have access to as much company knowledge as the employees themselves.
It's about managing investor sentiment. Core profitability of their ad business (as indicated by CPC) has been declining for I think 9 or 10 quarters in a row now? They're aggressively monetizing all their services and products because of this to keep driving aggregate clicks up. "We'll make it up in volume"
They need shiny baubles to dangle in front of investors in the absence of creating real new markets and businesses that generate cash flow. It's not just for investors either. They're attempting to be perceived to be an innovative company in the eyes of their various stakeholders (employees, potential employees, tech press, the general public, regulators, etc.) even though they're pretty much the new Microsoft in terms of milking their one hit (advertising).
Funny enough, Google's core business is being disrupted by the mobile revolution ushered in by Apple (you won't read that particular narrative in the tech/financial press because Google X and other high-profile "moon shots" have been effective in accomplishing the PR objective). Android was a completely defensive move about making sure the erosion to that business was limited and that they'd have a slice of the advertising pie even if it's fundamentally less rewarding than desktop advertising. If Google had attempted to sell Android it would have never been as successful, so there was no choice, it was purely about staunching the bleeding.
This is why Google has been so acquisitive for so many years; they're desperately searching for new businesses that make money (and also clearing the market of anything that could threaten their existing one). The tech media interprets this as being "bold" and "innovative" (which really doesn't make any sense when you think about it) but it's really out of fear and desperation. Companies that have defensible moats around their business don't need to overpay or rush into deals. The media cheerleads it because it gives them something to write about and the resulting boom in Silicon Valley has flowed to them as well. VCs cheerlead it because they rely on these insecure companies to provide ample exits for their portfolio companies at lofty valuations (https://twitter.com/cdixon/status/427602474086584320). Follow Marc Andreessen on Twitter to see him try to justify valuations in technology and dispel any comparisons to the Dot Com boom. Facebook does this as well, but fortunately for them they have a stock that is insanely overvalued which allows Mark Zuckerberg to use it as currency. Google's valuation isn't as generous, but more importantly these acquisitions have been diluting Larry and Sergei's controlling interest (something they recently rectified with a new class of shares). So I'm sure they'll be matching Facebook's pace in no time.
It is perfectly reasonable to seek out other revenue streams. It is still a land grab. There are many other megatech companies that aren't innovating or acquiring and are slowly dying. The "tech platform" evolves every 10-20 years. Innovate or die. We already talk about the Internet of things. Mobile apps and mobile access are clearly eclipsing the PC. Odds are the next Facebook or Google starts as some mobile app not yet invented.
how do they plan that? they would want the technology news to come before the result news to soften the landing? or they would do it after to try to cheer up the stock?
There are billions of dollars at stake. They know what the estimates are the whole time, and they have a pretty good idea for weeks/months on whether or not they are going to hit them. They would be borderline insane to not have PR plans in place. It would be naive to think otherwise.
I always fear what will happen to all of Google's well-intentioned businesses and ethical thresholds when / if the river of money starts to narrow. Will they try to bring back their revenue with ever more desperate measures? Will they slash and burn their investments? Or will they stick by their guns and keep plowing money into new projects, continue walking the thin line between "creepy" and "useful" without ever erring across it, even while their kingdom crumbles?
We've never had to ask this question because on the back of an expanding internet Google has risen with the tide regardless of their own performance (and I'm not saying their performance has ever been poor, just that we have no way to know in absolute terms). This particular instance may be nothing, but every time they miss a mark I wonder whether we'll finally find out where their principles truly lie.
Google is overpriced IMO, their PE has been at around 30 for quite a while. At their size it's extremely hard, if not impossible to keep growth at level to justify the high PE. Google's PE should be around 15-20, max. Personally, I'd rather own MSFT, better diversified and offers a dividend.
Their SE is unbearable without ad blockers already.
It doesn't really make sense to compare this number with other companies in the same sector. Long-term, the stock price needs to reflect the actual income and growth of the company. Otherwise we are in "greater fool" territory. There is good reason to be skeptical of Amazon's valuation, and that of many other tech companies.
(Not that for the record, I am almost exclusively a growth investor in the speculative part of my portfolio).
Google still has room to grow, though. I am actually more worried about Facebook's risk/reward profile.
But I think their growth is artificial and not sustainable. It's obvious that their growth has been achieved by adding more ads to the pages even as their CPC is crashing. .
"Markets can remain irrational a lot longer than you and I can remain solvent." comes to mind ...I was right two years ago but Google continues to surprise me with their audacity and ability to suffer no penalties by users and governments.
But eventually everything will be ads and someone might notice ;)
Google has huge cash reserves ($60 billion), so you really should look at P/E adjusted for cash and cash equivalents on their balance sheet. Ex-cash, it's about 19.
