Oppenheimer analyst Sandeep Aggarwal has weighed in on the mortgage-impact-on-online-advertising debate with a careful, lengthy analysis. Despite cutting estimates on Google (GOOG), Yahoo (YHOO), and other Internet leaders, Aggarwal remains “cautiously optimistic” about the mortgage situation. As described here, after performing a similar analysis, we remain cautiously pessimistic. The key differences between Aggarwal’s analysis and ours are:
*Conclusion. Aggarwal cut estimates on Google, Yahoo, BankRate, and Valueclick based on the mortgage crisis, even though he believes the mortgage impact on these companies will be small. In our experience, once estimates start going down, they usually keep going down. We believe the mortgage crisis will have a ripple effect on other industries, such as broader financial services and retailing. We believe the full effect will take at least a year or two to play out and could be severe enough to cause Google, et al, to miss estimates in Q4. (Aggarwal, obviously, disagrees.)
*Different “financial services as percentage of online ads” estimates. Aggarwal bases his analysis on an IAB estimate that financial services accounted for only 16% of online advertising in 2006. We used a more recent figure of 34%, based on Nielsen impression counts for the month of July. Because financial services ads grew 79% in 2006 (growth that surely continued into the first half of 2007), we believe that Aggarwal’s 16% figure is likely too low. Moreover, because the sector’s growth rate was so high, even a slowing of growth (rather than a shrinkage) would affect the overall industry.
*Paid search vs. Display. Aggarwal estimates that paid search accounted for about half of financial services sector spending in 2006. We agree with the theory that paid search (e.g., Google) will be more insulated from an ad recession than display advertising. We do not agree that it will be immune, however.
Bottom Line: We believe the change in trend is more important than the exact percentages (which no one outside the companies knows for certain). Online ad spending by mortgage and financial services companies nearly doubled last year and accounted for a significant chunk of the overall market. At the very least, the growth rate of this sector’s spending has likely slowed significantly (and, more likely, has stopped growing or shrinking). We believe the contagion will spread, but even if it doesn’t, we believe the Internet leaders (and their investors) will feel the impact.