Google Ad Revenue Clicks Slipping as Economy Slows

As the economy slows and tensions rise in the stock market innter circles, the stock for Google Inc is being devalued.

With an economic slowdown high in the minds of investors comes the news that fewere people are clicking Google's adsense ads - the "pay as you go" advertising method that has made them wealthy.

If no one clicks the ads - then Google doesn't draw any revenue from it's advertisers. Since pay-per-click is essentially the central revenue source for Google (nearly everything else they provide is free) a dramatic decline in ad clicks could drive the Internet giant to it's knees financially.

A report from Internet research firm comScore Inc., shoved Google shares to an 11-month low. The drop extended a slump that has lowered Google's market value by 33 percent, or about $70 billion, during the first seven weeks of the year. The tech-laden Nasdaq composite index has declined by 12 percent during the same stretch.

The sell-off represents a sobering shift in Wall Street's sentiment toward Google, whose dominance of the lucrative Internet search market had convinced many investors that the company would thrive even in a recession.

This excitement helped propel Google shares to a peak of $747.24 in early November and kept it just below $700 as the new year began. The stock price closed Tuesday at $464.19, down $22.25. The shares sank as low as $446.85 earlier in the session, a level that hadn't been reached since last March.

Disappointing fourth-quarter earnings growth and comScore data pointing to sluggish ad growth in January is causing more analysts to conclude even Google may be pulled down by the sagging U.S. economy.

Looking ahead, some investors are worried about Microsoft Corp. becoming a more imposing competitor if it pulls off its proposed takeover of Yahoo Inc.

"We don't see a compelling reason to buy the stock right now because we think there's going to be a rocky few months ahead for Google," said Stanford Group analyst Clayton Moran.

Other analysts, though, say they still believe Google will deliver stellar earnings and revenue growth this year. They attribute the recent slowdown in Google's growth to deliberate changes that were made to weed out advertising links that don't conform with the company's policies or don't appeal to consumers.

Although the revisions may hurt Google in the short term, Susquehanna Financial Group analyst Marianne Wolk reasons the improvements eventually will pay off by displaying more ads that elicit consumers' interest — an upgrade that probably would spur more spending by Web surfers and marketers alike.

"We believe there is some room for optimism on several of these issues so that the outlook may not be as difficult as the market fears," Wolk wrote in a research note Tuesday.

Just a few weeks ago, Google Chairman Eric Schmidt tried to dispel the notion that the feeble U.S. economy had undercut the company's fourth-quarter revenue, which rose 51 percent to $4.8 billion.

"I am happy to say we have not seen a negative impact from the rumors of a future recession," Schmidt told analysts during a Jan. 31 conference call.

But comScore's statistics indicate Google had an unusually difficult January. The number of Google's paid clicks in January totaled 532 million, down from 533 million at the same time last year according to Reston, Va.-based comScore.

It marked the first year-over-year decline in Google's paid clicks during the six months for which comScore has comparable data. In the previous five months, Google's paid clicks had increased by a range of 12 percent to 60 percent.

While comScore's data isn't precise, its statistics historically have pointed in the right direction. For instance, comScore estimated Google's fourth-quarter clicks increased 25 percent from 2006, slightly below the 30 percent increase that the company ended up reporting, marking the slowest growth of 2007.

Even if January was as weak as the comScore research suggests, RBC Capital Markets analyst Jordan Rohan argued that it's too early to write off Google's first-quarter. That's because Google usually picks up large chunk of its first-quarter profit in Europe, where the economy is holding up better, and typically benefits from a surge in spending in March.

Analysts, on average, are expecting Google to earn $4.67 per share in the first quarter, excluding expenses for stock awarded to its employees. That would be a 27 percent increase from last year.

"We believe that investors' fear … is overblown," Rohan wrote in a Tuesday note. He predicts Google's stock could be trading at $675 again within the next year.

Although Google steadfastly refuses to provide analysts with financial guidance, more clues about the company's first-quarter performance could emerge March 3 when its engineering chief is scheduled to speak at an investment conference in southern California.