This is normally cause for calamitous outcry, but let’s put this into perspective. While the stock drop is ominous, investors generally aren’t panicking about Google because there is a consensus that Google at $750 was ridiculously overvalued, even during a sounder economic environment in November 2007.
Investors at that time put more realistic values on Google’s stock that were $200 to $300 below what Google was trading for. Now investors such as Citi’s Mark Mahaney put targets of $300 to $400, which are greater than the search engine giant’s current price.
So there has been some serious correction going on in light of the dreadful macroeconomic environment, or, shall we say, the current recession. Employees are annoyed that their stock options tanked and investors who didn’t profit from sell-offs before this past summer are banging their heads against hard surfaces. Yet Google is largely unscathed.
Why? Well, if you remember from Google’s third-quarter earnings call (and the last few earnings calls, in fact), CEO Eric Schmidt has said Google remains well-positioned to withstand a recession because of its robust search advertising business. The third-quarter numbers bore that logic out; Google’s Q3 profit jumped 26 percent from the year-ago quarter. Schmidt’s adoption of the Mad Magazine “What, Me Worry?” mantra seems justified to date.
What’s driving the search ads? Well, clearly people are using Google to search more than ever. New numbers the week of Nov. 24 from HitWise bear this out, as Google notched 8.1 percent more searches than it did in the year-ago period. Laid-off people have more time to do Google searches for employment opportunities, is one idea. Perverse as it is, Google profits from this.
Google logged 4.8 billion search queries, or 61.2 percent of the market, in October, setting Google up for a solid fourth quarter. Fielding more search inquiries, as the AP pointed out Nov. 25, generally gives Google more opportunities to show ads and pocket a commission.
Indeed, after the HitWise report was released, Google shares surged $18.39, or 7.1 percent, to $275.83 in afternoon trading. The number is higher than that today.
With search ads as Google’s main source of income, the company in the last several weeks has made progress in advertising on YouTube, has accelerated its innovation of Gmail in Google Apps and wisely walked away from that flopping fish Yahoo before a legal battle with the Department of Justice that would incur great expenses for potentially years.
So, Google hasn’t dropped too many balls and could even please financial analysts and investors because it is cutting as many as 10,000 contractors to rein in costs by paring head count. It’s even gone conservative on its usually lavish holiday parties.
What’s not to like about Google’s viability to weather a recession? It’s not as if it’s Yahoo, which is leaderless and floundering financially and in its core markets.
Yang waved the white flag on the CEO role; Yahoo’s stock has lost two-thirds of its value since it rejected Microsoft’s acquisition bid; and Google abandoned it in its hour of need.
So, for the reasons above, I think Google is in fine shape through the rest of the year. But 2009 could be a different story, and I suspect we’ll learn a lot more about Google’s mettle by next summer as we slide deeper into the recession. Cross your fingers.