Yesterday, Google released its earnings for the fourth quarter of 2011. On the whole, it was a strong quarter for the digital advertising giant. But Wall Street reacted in a way that seems counterintuitive. Since the earnings’ call, $18 billion has evaporated from Google’s market cap as share prices fell ~8%. So, what’s happening here? Is there really cause for concern? Or are Wall Street’s concerns overblown?
To get a more complete picture, let’s look at the relevant pieces of Google’s business and performance.
The Big Picture
Google’s revenue for the fourth quarter was $10.6 billion, representing a year-over-year (y/y) top line growth of 25%, and marking their first $10 billion plus quarter. Though I usually don’t wax poetic over corporate financials, there is something strongly significant and symbolic about having hit the rarefied $10 billion quarter club. Way to go, Googlers!
Google’s Core Search Business
Click Volume – Paid clicks were up 34% annually (y/y), implying more users are more engaged with Google.
CPC – Cost per Click declined 8% on a y/y basis, implying customers are getting more volume (clicks) for their advertising spend. This dynamic is important to keep in mind as cheaper clicks are better for advertisers, and assuming click quality doesn’t decline, will lead to increased investment in Google.
Wall Street’s Reaction
There’s probably more to dissect in these earnings, but this is probably a good place to pause and examine Wall Street’s reaction.
To put it plainly, Wall Street didn’t like any of the above. Shares plummeted ~8%. The big issue for Wall Street (based on the nature and frequency of analyst questions) was around the decline in Google’s average cost per click.
But this shouldn’t really be a factor because the marginal cost of a click (for Google) is zero. And assuming that click volumes are rising faster than changes in the cost per click, which they are in this case, Google’s top line revenue shouldn’t really see an impact.Net net, if cheaper clicks brings more advertisers on-board, than Google will more than make up on volume.
To be fair, I’m not looking at the slowdown in Europe or issues around currency (F/X) hedging in this blog post. (I’m also not looking at the positive impacts of mobile, social and display) But, those issues are a) extrinsic and b) volatile, and in retrospect, Wall Street may have over-reacted to Google’s numbers.