Finally, we’ve reached the first real sign of a bottom in Google’s stock price: A sell-side analyst now rates the stock “SELL.” Most of the Street is still bullish, so we probably need a few more frustrated sorry-I-blew-you-up downgrades before we reach the bottom, but this is definitely encouraging.
Merriman Curhan Ford analyst Richard Fetyko, via Barrons:
Click volume and search ad pricing are under pressure, and so we are initiating coverage with a Sell rating. Google is likely to be among the first to rally as the economy stabilizes; however, near term, we see downside to consensus estimates and believe that investors will get a better entry point in the next six months.
Based on our checks, the decline in consumer and business purchasing is having a dampening effect on search-engine marketing (SEM) — keyword prices are down 5%-30% from the third-quarter of 2008, traffic to ecommerce sites is also down year-over-year and quarter-over-quarter, and click-through-rates on ad listings are declining as well. These trends are not yet reflected in consensus estimates, in our view.
SEM is expected to be among the last places to see cuts, and we are there now. Advertisers are adjusting their keyword buys to protect their margins and returns on investment, which are under pressure as sales-conversion rates and average order value dropped, based on our checks.
Google’s paid-click volume is also under pressure. Since consumers and businesses have reined in their spending, they are searching for fewer commercial items and are clicking on fewer ads (click-through rates dropped), which translates into slower growth in paid-clicks volume (key revenue driver).
Weakness has also spread overseas. Domestic growth has decelerated in 2008, and we expect international regions to slow in the fourth-quarter of 2008 and 2009 as well. U.K. ad revenue was flat for the last three quarters, and the rest of Europe and Asia are seeing cutbacks in ad budgets as well. Germany and Japan recently officially slipped into recession…
We see the stock touching down to $200-$240 near term, which is where we would consider buying it.
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