February 28, 2006 1:23 PM PST

Google slowdown no surprise

Google shares tumbled Tuesday after the company's chief financial officer said, "Really most of what's left is just organic growth, which means you have to grow your traffic and you have to grow your monetization."

Google Chief Financial Officer George Reyes told investors at a Merrill Lynch conference Tuesday morning that "clearly our growth rates are slowing. And you see that each and every quarter. And we're going to have to find other ways to monetize the business." Google's share price was off more than 13 percent at one point Tuesday, before recovering somewhat in afternoon trading.

In a statement Tuesday afternoon, Google clarified Reyes' comments: "As we have stated before, monetization improvements will continue to be a key factor in driving future revenue growth. We still see significant opportunities to improve monetization and intend to continue to focus our efforts in this area. Moreover, as we have stated in our SEC filings, our revenue growth rate has generally declined over time and we expect that it will continue to do so as a result of the difficulty of maintaining growth rates on a percentage basis as our revenues increase to higher levels."

To which we respond: Is this news? Here are some recent stories by CNET News.com and other sources that provide some context for Reyes' comments. As you'll see, the CFO's comments shouldn't have been a surprise--although the stock market's reaction is never predictable.

• First earnings miss Google's stock has dropped more than 10 percent since the company missed fourth-quarter earnings expectations last month--its first earnings stumble since going public in August 2004. The company would have beat analysts' estimates if not for a higher-than-expected tax rate, Reyes said. The stock had increased more than 400 percent since going public, to an intraday high topping $475 in mid-January.

• Dependence on online ads From AdWords on search results to ads Google sells that are displayed on other publishers' Web sites and ads that appear alongside its free Gmail service, nearly all of Google's revenue comes from advertising. And Yahoo and Microsoft are nipping at its heels. To see a chart of Google's products and services click here.

• Criticism over China Google is looking to the vast and largely untapped Chinese market for growth, but even that business could be threatened. The company, along with Yahoo and MSN, has been blasted by members of Congress over cooperation with China's censorship policies. A bill has been drafted that would restrict such activities.

• Fighting U.S. subpoena Google's stock took another hit in January as investors worried that the company will be mired in a costly legal battle with the U.S. government over privacy of customer data. Google is challenging a Justice Department request to hand over nonpersonal search information. The case is pending.

• Copyright setback Google's sweeping search practices were dealt a legal blow when a federal judge ruled last week that portions of the company's image search site, which displays thumbnail versions of photos found on other sites, likely violate U.S. copyright law.

• Trademark, click-fraud lawsuits Google's core keyword-search ad business has been targeted by lawsuits over alleged trademark infringement and click fraud. CNG Financial has sued Google alleging that the company lets competitors buy keywords using CNG's trademark. Google is also named as a defendant in several class action lawsuits over advertisers being charged for clicks on online ads that are supposedly theirs but that they say are fraudulent.

• Book-scanning controversy Google has also been sued over its Book Search Library scanning project, which some publishers' and authors' groups argue violates copyright law.

• Ads in print, over the air Google is looking for ways to extend its lucrative advertising business model beyond the digital realm. The company has been experimenting with selling ads for print publications, with mixed results (articles on the topic can be found by clicking here, here and here). Google also is teaming with EarthLink on a wireless Internet proposal for the city of San Francisco, which likely will involve ads. Google also recently acquired DMarc Broadcasting, a company that sells ads that run on radio, and it plans to integrate the technology into its AdWords platform, creating a new radio ad distribution channel for Google advertisers.

• Hiring pace Google has been expanding at a phenomenally rapid rate, with Reyes saying in the conference call that 50 to 60 people are hired each week, raising questions of whether the company can retain its innovative, engineering-first culture and adequately manage its growth. Stories about Google's frenzied expansion can be read here and here.

• Blodget gets bearish Piper Jaffray recently bumped its 2006 price target for Google up to $600. However, former securities analyst Henry Blodget has speculated that slowing growth in online advertising could cut Google's stock to $100 a share. "Both market saturation and price pressure will occur naturally someday, as they do with every business. The only question is when," he wrote on his Internet Outsider blog.

Later Tuesday afternoon, Google's P.R. department released the following statement to "clarify" Reyes' comments: "As we have stated before, monetization improvements will continue to be a key factor in driving future revenue growth. We still see significant opportunities to improve monetization and intend to continue to focus our efforts in this area. Moreover, as we have stated in our SEC filings, our revenue growth rate has generally declined over time and we expect that it will continue to do so as a result of the difficulty of maintaining growth rates on a percentage basis as our revenues increase to higher levels."

Though Google executives strictly adhere to a policy of not providing public financial guidance, Wall Street is undoubtedly anxious to get more answers at the company's annual analyst day on Thursday.

See more CNET content tagged:
monetization, CFO, online advertising, Google Inc., Yahoo! Inc.

5 comments

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Porn's little helper
let it fall
Posted by Stan Johnson (322 comments )
Reply Link Flag
It is gravity ..
... all things have to come back to the ground eventually. But, has google hit the ceiling? Sky is the limit.
Posted by Believe Brain (64 comments )
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Hell no!
Geesh.. Google this Google that... the bubble isn't going to burst.. there are soooo many other ways... The question is the Adsense program making or losing money? that's it.. because it and any overture on "affiliate" sites is about to die a horrible death and spammers try and take over.
Posted by djpaisley (80 comments )
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Watch out! Investors ..
This article has suggested that Googles stock plunge shouldnt have been a surprise. This type of afterward smartness irritates me so often. I am saying, this article will have more meaning a week ago.

If the stock price did not go up to $390+ last few days, it would not have todays pullback. The questions are: 1) why had investors ignored all listed problems? 2) who had brainwashed investors to be so optimistic last few days? 3) where did the investors money go?

Some analysts blame the volatility of Googles stock on the companys steadfast refusal to make financial projections and share details about its strategy. I dont agree with that. The volatility of stock prices has very little to do with guidelines and projections. Many tech stocks are volatile, AAPL is one, and SBUX and EBAY are pretty crazy too.

Bambi Francisco of Marketwatch.com had put out a survey before 01-31-06 (last Googles report). The result of the vote: no more than 20% of it said Googles stock will stay below $400. The majority vote had believed that it will stay above $425. Should we follow the majority?

And, where are those analysts who had set $500 and $600 targets? I know. They had set that number for the end of 2006 or the end of 2007. I know. They can downgrade and upgrade anytime they want without supporting calculations. I know. Economy changes and they have to revise their numbers accordingly. In other words, their projections are nothing but meaningless guesstimates  an obsolete rumination.

I know. Investors have to use their judgment to filter information. But, the financial industry and media should have the responsibility to provide creditable information too.

Googles CFOs remark is totally opposite to its CEOs optimistic brag just a month ago. That is another devil of Google.
Posted by Believe Brain (64 comments )
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One analyst says $600, another $100, why pay them?
Heck even I could be an "analyst"!
Posted by bobby_brady (765 comments )
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