Shinal: Google’s earnings report points to renewed concerns about declining ad prices.
For the second July in a row, Google has put a small scare into Wall Street by reporting some unpleasant surprises with its second-quarter results.
The most important to investors was a 6% year-over-year decrease in its cost-per-click metric, which reveals the trajectory of ad prices in Google’s core search business.
The CPC number has been falling for more than a year, as mobile ads and ads sold in developing markets become a larger share of the company’s revenue. But until Thursday, the trend had been decelerating for three straight quarters, after Google had spooked investors last summer with a 16% year-over-year drop.
By April, Google was reporting only a 4% annual drop in its CPC metric, and investors’ fears that the company might be facing a long-term slide in prices ebbed. That renewed Wall Street optimism on the stock, which had taken a hit after CEO Larry Page paid $12.5 billion for a Motorola Mobility acquisition last year that left many investors scratching their heads.
Before its most-recent earnings report, Google shares were up 25% this year and nearly 60% in the past 12 months. The reversal in the CPC number should give investors pause, especially with Google shares still trading near a record high.
To counter the trend of falling search ad prices, Google has rolled out what it euphemistically calls “enhanced campaigns.” That innocuous-sounding phrase means the company essentially no longer allows professional search ad buyers to choose to place client’s ads ONLY on a smartphone or tablet computer, for example, as opposed to having the ad appear on a consumer’s PC desktop.Google’s search algorithm now chooses the device on which to place the ad, which helps blunt the impact of lower-cost mobile ads on the company’s overall search business.
Although the cost of ads on tablet computers are now approaching those served onto desktops, mobile ads still cost just a fraction of those.That’s why Facebook is doing the same thing as Google â€“ taking control of where ads get served to its social network users.
Until Thursday, Google’s CPC numbers over the past year suggested that it had quickly figured out how to deal with the rapid rise of the mobile ad market. Now that looks less sure.
At the same time, though, Google has been making up with volume what it’s been losing in average search prices. The company’s number of paid clicks â€“ or how many times consumers click on a Google ad â€“ surged 23% in the second quarter. That was higher than the 15% to 20% rise that analysts were expecting.
It was also higher than the 21% year-over-year growth reported by Yahoo two days earlier, which means Google is still taking market share away from its chief rival â€“ in a market that Google already dominates. That’s a big part of why Google shares were down only 2% or so on today, despite the fact that its revenue and profit both fell short of Wall Street expectations.
Google’s second-quarter revenue â€“ minus the payments it makes to the search ad partners that feed it online users â€“ rose 15.5% compared to a year earlier.
Since Google integrated Motorola results into its own, its annual revenue growth has fallen below 20%. On the eve of earnings, analysts, on average, expected Google to post top-line growth of 16% next year.
Yet if that 2014 revenue-growth estimate comes down during the next few weeks as analysts plug Google’s latest, lower-than-expected numbers into their financial models, look for Google shares to give back some more ofthis year’s gains.
The fear that Google is in a mature business that will face long-term price pressure has been revived by its latest quarterly report.