RBC analyst Jordan Rohan held an exclusive investor dinner in Manhattan last night, featuring ad network, social networking, agency, search, content, and lead-gen executives. Two key points:
Rohan believes that Google (GOOG) and Bankrate (RATE) will have strong Q3s. We have previously argued that weakness in the mortgage sector puts the future performance of these and other companies at risk. We think this is more of a Q4 issue than Q3. Rohan is confident that both made it through Q3 unscathed.
More importantly, Rohan argues persuasively that Google has plenty of dry powder that it could use to offset weakness from the mortgage sector or the broader economy. Unlike other “Google is immune” arguments, Rohan’s is backed by clear logic. A search-engine-marketing expert at the dinner said that Google has not taken advantage of a recent algorithm change that would allow it to increase minimum bid prices on keywords. Rohan believes that if/when Google needed a revenue lift, it could just flick this switch. Rohan also believes that if Google had needed extra revenue in Q3, it would have taken advantage of the change. (Rohan’s explanation after the jump)
This potential change alone is not particularly persuasive about Google’s ability to weather a broad downturn (it might buy Google a quarter, but little more) But Rohan’s argument reminds us that Google hasn’t even scratched the surface of what it could do with display advertising. Unlike, say, newspaper web sites, Yahoo, and CNET, which have monetized every available pixel, Google’s religious devotion to a “clean” look has left it with oceans of highly valuable, untapped inventory. Making the site look like a NASCAR hood would destroy the experience, but adding some tasteful “sponsored by” buttons (or equivalent) wouldn’t. And this continual layering on of new products could allow Google to power right through a recession.
A final note: As we observed yesterday, some analysts have pointed out that Google has slowed its hiring pace considerably in Q3. If Rohan is right that Q3 was a blockbuster, this should work wonders on margins and the bottom line. (And that, in turn, should make Google investors go hog wild…)
RBC’s Jordan Rohan on Google:
Google Hasn’t “Needed” Lift from Recent Algo Change: Google informed SEMs in July about a change to the paid search ranking algorithm launched on August 21. The change gave Google the ability to set higher minimum bids for the paid links on the top of the Google search results pages — creating a bidding environment for that premium inventory which is different than the bidding for the ads on the right rail.
Importantly, our SEM expert stated that Google has yet to push through higher bids from advertisers, even though with this new twist to pricing, it could.
In our view, business at Google must be so strong that GOOG doesn’t need the extra revenue this quarter. Google is not likely to admit to these motivations, but the opportunity now exists for Google to crank up the monetization whenever Google sees fit, creating a buffer against macro headwinds.