Well, this ought to catch some folks attention, written by the fellow who called Amazon $400:
I’m just laying out a scenario that could kneecap Google and take its stock back to, say, $100 a share.
Google’s major weakness is that it is almost entirely dependent on one, high-margin revenue stream. The company has dozens of cool products, but with the exception of AdWords, none of them generate meaningful revenue. From an intermediate-term financial perspective, therefore, they are irrelevant.
So, the question is, what could happen to AdWords, and what will happen to the company (and stock) if it does?…
… let’s say click fraud continues to increase as a percent of total clicks (which seems perfectly plausible to me). Eventually, all else being equal, ROIs will start to decrease, as the $1.00 keyword that delivers a profitable sale today will deliver an unprofitable one tomorrow.
10 thoughts on “Blodget: A Google Bear Scenario”
But: If the ROI decrease through click fraud this don´t change the AdWords revenue. Because there are more clicks (the fraud clicks 😉 ), of course more clicks with a lower price. But for Google this don´t change anything.
I think the big problem with click fraud could be an image problem when advertiser stop to advertise with Adwords because of the bad press.
The thing about all these scenarios being made is that they are all possible – both bears and bulls. Furthermore, good and bad times are inevitable for all companies.
What’s more important to me is how well a company manages itself despite the conditions. Does it take good advantage of its strenghts (Google has done this well in the way they are responding globally, and constantly building on their advertising model).
And then, how well do they manage themselves in difficult times. Now, concerning this, Google has not have difficult times yet for us to judge. But we have already seen that google is frugal (at least in their business decisions), and seem to make safe business decisions. Furthermore, they seem to take a long term approach, which is always best. And despite all the criticisms of Google, they seem to be a learning company.
Google will definately have difficult times, but I think they have shown themselves to be a company that can survive it and bounce back. But who knows, time will tell.
What intrigues me is that Google, filled with very bright folks who probably knew what was coming in terms of revenues and prospects, felt that the correct value of the shares was about $85-100 at IPO.
What has fundamentally changed since that time other than G’s price?
Google is indeed filled with smart people and they had smart bankers advising them during the IPO process. If I recall correctly, they wanted to price their offering at 115 but institutional investors balked due to some misteps (playboy article) and the unusual nature of the dutch auction. They did believe that fair value was above the offering price and beyond that, I don’t think they realized how quickly earnings would grow. So what has fundamentally changed? Their fundamentals!
Zack that “killer fundamentals” talk in the face of PE 110+ and rising is sounding …. familiar…
Hey! Where were YOU in 1999 dude?
Blodgett couldn’t be more wrong about how click fraud would affect Google. More fraud will actually strengthen their position — because with Analytics plus their margins and power as the leader, they can afford to offer a money-back-guarantee on every click delivered. “Pay for only the exact quality clicks you like,” they can say. This makes click fraud a non-factor — and could be a KO blow to their smaller competitors, who couldn’t match such an offer.
(I write this up in a bit more detail in “Google Analytics & the “pay-per-click-you-like” future” and a previous post linked there.)
Click fraud will not kill Google. Just because they haven’t released a solution for it yet doesn’t mean that one doesn’t exist, it just means that there hasn’t been significant market pressure yet. As Gojomo already mentioned, their analytics solution can handle at least some of it, and there is at least one other company out there (Litmus Media) that even has a tested on-click solution. When the market gets frustrated enough, Google will simply release the solution.
I know Blodget is only speculating about a possible scenario, but I think click fraud is a red herring.
Bill Gross already has the solution to click fraud and it’s called cost-per-action. If an advertiser only pays for clicks that result in a sale, then the click fraud problem evaporates — let anyone click on ads all day long, it won’t cost the advertiser a cent. The Wired article “How Click Fraud Could Swallow the Internet” raises some issues with cost-per-action, but they seem trivial and easily fixed to me. In fact, the rumored Google Wallet sounds like a viable solution to any problems with the cost-per-action model.
If Google has the solution to click fraud now, why don’t they use it? The answer is simple, Google makes money from every click, whether it’s fraudulent or not. There is no incentive to fix it — yet. When the day comes that Google starts to feel the pain of click fraud, you can be sure they will roll out their solution.
I see the potential for federal anti-trust action as the snake in the grass for Google.
How can one company corner the marke for search, not tell you the parameters for sorting the list, arbitrarily police that system, and offe goods sold by that system…doesn’t that sound like a monopoly or at least tending towards stiffling competition? Can this be in the conumer or the govt’s best interest?
Just a though.
What can affect Google AdWords? Time.
Every business nowadays needs to change faster then ever. Having global competition, the possibility that someone will have a better idea has increased over the years.
I’d even suggest a reverse Moore’s Law for business where every market/solution/product/idea will have shorter life then the one they just replaced.
So that’s more like the new business world, that instead of ‘bubbles’, is closer to a rollercoaster…