Shares of Google (GOOG) are down $51.71, or 8%, at $587.86 after the company last night missed Q4 revenue and profit expectations as the fee it gets paid for each click, the so-called cost-per-click, or CPC, unexpectedly dropped in the quarter, a matter the company sought to explain on the conference call afterward.
There’s just one downgrade this morning, from BGC Capital Partners’s Colin Gillis, who cut his rating to Hold from Buy, writing that the results were “solid but not stellar” during Google’s seasonally strongest quarter of the year, and that as a result, the stock is “dead money till summer.”
Of the cost-per-click decline, Gillis writes, “It is worth noting that an increase in paid clicks with a sequential decline in click pricing indicates a consumer that is focusing more on discovery and less on transacting in our opinion.”
The rest of the Street seems inclined to accept Google management’s view, at least in part, namely that changes are happening in the business model, but that they’ll all work out:
Michael Graham, Canaccord Genuity: Reiterates a Buy rating while cutting his price target to $700 from $725. Google “missed numbers almost entirely on currency dynamics with a much smaller impact from unfavorable traffic mix,” he thinks. “While results were disappointing, these issues should pass, and underlying growth-predicting metrics were strong.” As for the cost-per-click issue, it was partly a function of currency, and partly just intermittent ad buyer confusion: “It seems clear, however, that pricing was indeed much lower on a lot of this new inventory. We believe a large part of this was due to advertiser unfamiliarity with new Ads Quality changes. We also believe that there were a lot of new, very inexpensive mobile paid clicks in the quarter that the company is hesitating to shed too much light on. We believe the Paid Click growth is bullish, and that the company will sort out how to monetize it over time.”
Sameet Sinha, B. Riley & Co.: Reiterates a Buy rating, while sticking with his price target of $724. He’s inclined to believe management, though he warns that mobile ad rates are something to keep an eye on: “Management indicated that FX ($250 million impact), new product formats (Sitelinks and Mobile), emerging market volume growth and ad quality improvements had an impact on CPC [�] However, one of our concerns is cannibalization, i.e., if consumers start to do searches on mobile devices over desktop, then revenues could be impacted as mobile CPCs are 10-15% of desktop CPCs. GOOG�s claim so far is that mobile searches are incremental to desktop searches. We will be keeping a watchful eye on this trend.”
Heather Bellini, Goldman Sachs: Reiterates a Neutral rating on the shares and a cut her price target to $600 from $685. Bellini thinks the Google model is changing, especially with the impending purchase of Motorola Mobility (MMI), and thinks investors ought to prepare for that: “To be fair, CPC�s should be looked at along with paid click growth, which came in at 34% yoy. We believe the market needs to raise expectations on paid click growth going forward and materially lower its CPC estimates as ad format and mix changes continue [�] We continue to believe Google�s initiatives in mobile and display continue to grow rapidly [�] The coming test, in our view, ???????will be the closing of the MMI deal (expected this Spring). Ultimately, we ?believe the Street is underestimating the business model changes and margin implications that will result.”
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