In the wake of Comscore’s shocking January click report and some lousy anecdotes from search-engine marketing firms, Google analysts have begun trimming their 2008 estimates. Unfortunately for Google shareholders, we think these cuts have a ways to go.
Our analysis suggests that the current consensus for Q1 now reflects the anecdotal US weakness the market has learned about in January and February. If March data is also weak, however, we expect Q1 consensus has further to drop.
We believe the current consensus for full-year 2008, moreover, is even more at risk. If current trends continue and Q1 proves weak, we expect 2008 consensus will continue to come down.
The drop in Google’s stock price and rapidly reduced investor expectations have made Google’s stock a safer play. That said, it’s hard to see the stock moving sustainably higher in the face of continuous sell-side estimate cuts.
ANALYSIS: Q1 Estimates Still At Risk
The consensus for Google’s Q1 revenue growth is now 44% year-over-year (8% sequential), which is down from 52% in Q4. This consensus allows for significant deceleration in the US business, which most of the weak anecdotes suggest is occurring.
To test this consensus, we have modelled a sharp deceleration in Google’s US business from 40% in Q4 to 28% in Q1, along with trend-line deceleration in the UK and Rest-Of-World. Relative to the expectations before last quarter’s results, this US deceleration would have been shocking, but we think it is now factored into consensus estimates.
That said, anecdotal spending data suggests that the US business could decelerate to 25% (or worse) in Q1, which would likely cause either a Q1 miss or further estimate cuts. Even if the international business is stronger than expected, moreover, we think investors would be spooked by a US problem. So we don’t find arguments that “international will save the quarter and stock” to be particularly compelling.
Full-Year 2008 Estimates More Exposed
Google’s full-year consensus, in our opinion, is even more exposed. Wall Street currently forecasts that Google’s revenue will grow 38% in 2008. Given that the current Q1 forecast calls for only 42% growth, we have a hard time seeing how Google will continue to decelerate through the year but still average 38% growth.
Will the “Second-Half Recovery” Save Google? The DoubleClick Acquisition?
Will the much ballyhooed “second-half recovery” save the year’s growth? Possibly, but if the economy continues to deteriorate in the meantime, we doubt investors will gaze across the valley to the recovery on the other side.
Also, having lived through the 2000-2002 downturn, we are very sceptical about this “second-half recovery” theory. In our experience, the return to prosperity is always projected to be about six months away, and we think it will be at least a year or two before this latest down cycle works its way through.
One thing could allow analysts to maintain their Google estimates: The consolidation of DoubleClick’s $400 million business. But the current estimates are for organic growth, not acquired growth, and the market usually sees through this.