Google to Curb Expenses as Wall Street Cuts Estimates on Google

By Clint Boulton  |  Posted 2008-12-03

Google to Curb Expenses as Wall Street Cuts Estimates on Google

Many media pundits and bloggers put up stop signs over the Thanksgiving break last week about Google laying off workers after it was determined that the layoffs were previously announced cuts of Google contractors.

Yet despite a bang-up third quarter, Google CEO Eric Schmidt didn't do his company any favors by telling the Wall Street Journal Dec. 2 (read a GigaOm synopsis here if thwarted by the pay wall) that "we have to behave as though we don't know" what's going to happen.

With that comes cuts of products or projects that aren't adding much, if anything, to the company's fat, yet perpetually hungry, bottom line.

Case in point: Google nixed SearchMash, a Web site it used to experiment with new ways to organize search results. However, Google also two weeks ago launched SearchWiki, which lets users tinker with results. These efforts are different, yet similar in philosophy. Overall, the move appears to be a tradeoff.

Google and Microsoft discuss exit strategies. Click here to read more.

Yet there can be no mistaking the shelving of Google's Lively virtual reality experiment, due to die a slow death until Dec. 31.

Even now, financial analysts are circling like hungry vultures. Citing recent weakness in the online retail and travel sectors, Bank of America slashed its Google stock price target by 23 percent and cut its fourth-quarter and 2009 profit estimates for the search giant. The bank doubts the likelihood that Google can maintain strength in its core search ad business.

Bank of America cut its price target on Google shares to $500 from $650 and lowered by 50 cents its profit view for the fourth quarter to $4.74 a share from $5.24, and for 2009 to $21.45 a share from $22.79.

Global Equities Research analyst Trip Chowdhry offered a direr scenario for Google in reducing his estimates.

Forecasts of Doom, Gloom for Google

In ordering a new 12 to 18 month price target of $260, which is less than the $275.11 Google stock closed at Dec. 2, Chowdhry noted:

Contacts tell us that y-y (year over year) the number of Keywords are down 2 percent to 5 percent, bid rates on many keywords are down 20 percent, while bid rates on a very few keywords were up 5 percent to 8 percent. Contacts tell us that Google is benefiting from the shift in ads from traditional media to digital media, however this shift is not sufficient to overcome the downward macro-economic pressures. Contacts also tell us that online users are selectively tuning off the right side of search results, which are sponsored links. This may reduced the number of paid clicks, which in turn may negatively impact Google's revenues.

Chowdhry also said internal conflicts of interest exist on Google's board, with venture capitalists possibly influencing Google to make business decisions. Moreover, he cited contacts who expect Google to lay off 10 to 15 percent of its full-time workers in 2009.

Adding insult to injury, Chowdhry noted that one of the negatives affecting Google is Microsoft's increasing success.

Microsoft is giving paid search credits to ad agencies, which is forcing Google to meet or beat these search credits, and is getting user IDs through its Live ID effort to drive signups. This drives traffic, which in turn spurs revenues.

Will Microsoft be able to capitalize on Google's alleged troubles as the recession deepens? Will Microsoft gain search share and wrest the cloud computing mantle from Google in 2009 with its Microsoft Azure Services Platform?

One wonders what Google will be able to do to stanch the many cuts Chowdhry noted, while simultaneously shaving off businesses that drag or drain the company's bottom line.

CEO Schmidt has held meetings with top executives to determine where to focus investment, according to the Journal. Top priorities include display ads, mobile advertising and Google Apps.

What Google manages to do (or not do) in these sectors will be noteworthy.

Rocket Fuel