Are The Analysts Wrong About Google’s Undervalued Stock?

Writers and analysts who keep an eye on the value of certain stocks, have been writing all year about the curious phenomenon of Google’s stock price. They generally say something along the lines of, “If you compare Google’s cash generation capabilities, why is it valued so much less than Apple?” or similar statements.

Is it true that Google is undervalued or, in fact, might the lower than expected stock price be due to none other than Google itself?

If you read this column regularly, you’ll know that generally, as Google releases its performance figures each quarter, I like to break them out and have a look at trends and performance as they relate to the international scene.

So, What Is Happening To The Value Of Clicks?

In the last couple of quarters, the discussion has revolved around the increasing number of clicks versus the value they generate for the company. Google has been protesting to the Street, that they don’t really understand technology and how it works. They’ve also been releasing some data related to mobile and how they’re impacting their click values.

So, check out the chart below for the kind of information the analysts are considering:

Since Q1 2009, Click Values Have Dropped 28 Per Cent

Since Q1 2009, Click Values Have Dropped 28 Per Cent

It’s a pretty frightening picture which shows that, indeed, the value of clicks (based on Google’s own figures) has declined by some 28% since early 2009. The counter argument, of course, is that “Clicks don’t correlate to cost, so they don’t have a direct bearing on the financial performance of Google.” Really? Is that actually so?

Is It Truly Mobile Which Is Having The Impact?

Surely, clicks do directly reflect the cost of both promoting the search engine to advertisers and the market as well as the data center investments required around the world to deliver that quickly and easily to every single user — including those who are accessing the data by mobile.

Growth Rates In Headcount & Sales And Marketing Spend Increase Again

Growth Rates In Headcount & Sales And Marketing Spend Increase Again

The above chart shows the cost of running Google from a sales and marketing as well as from a headcount perspective. If the cost of clicks was inconsequential, then Google would not need to be investing in additional headcount or advertising its own products — but they are.

As you can see from the chart above, these cost increases fluctuate wildly from quarter to quarter, but what is clear is that there is an overall strong momentum towards extra cost – and that’s before the impact of Motorola becomes apparent (bearing in mind that Motorola arrives at Google losing money).

Monetizing Google — Are We Really Back To That?

As you see below, if creating and delivering clicks reflects Google’s cost base, then costs relative to Global revenues are increasing at an astonishing rate.

We’re back to a scenario where Google has to start thinking, “How am I going to monetize this technology?” which would be the kind of thinking normally associated with a start-up. Google a start-up? However, this is likely the reason Google found it necessary to start charging for product search insertion.

Global Revenues Correlated To Click Volumes

Global Revenues Correlated To Click Volumes

Google’s significant investment in advertising its own products and recruiting its own people around the world used to be something which could be readily justified by the upswing in Google’s global presence. Even that is no longer true with international growth rates descending quite dramatically to reach the same levels as those in the US.

International Stabilises But Growth Rates Declining

International Stabilises But Growth Rates Declining

Now you could argue that this is to do with growth declining globally and you can say that growth will one day return. But that of itself is a new phenomenon and would mean that Google was in a mature market, not one with lots of exponential growth ahead.

If mobile that’s hot — well, Google isn’t yet extracting values from mobile marketing which can return it to its upward exponential trajectory.

Opinions expressed in the article are those of the guest author and not necessarily Search Engine Land.

Related Topics: Channel: SEO | Google: Business Issues | Google: Outside US | Multinational Search


About The Author: is a linguist who has been specializing in international search since 1997 and is the CEO of WebCertain, the multilingual search agency and Editor-in-Chief of the blog You can follow him on Twitter here @andyatkinskruge.

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  • Pat Grady

    Are those clicks values just for desktop/laptop search?  Mobile doesn’t convert as well, so we advertisers bid less.  But the traffic is additive to G – it’s not click cost erosion, it’s the addition of many more clicks that happen to have a lower click value, bringing the average down.  Display is also growing rapidly thanks to many improvements G has made, same dealio.  They’re growing G Shopping clicks as we speak, those will have a very high click value (shopping, winning, duh!).  Many advertisers are doing a better job of long-tail advertising (including using G’s Dynamic Search Ads), also lower click value volume to G, but additive.  There are other reasons why the click value has changed.  Anytime G reaches well into a new area, the lack of competition among advertisers in the auctions, and the lack of monetization expertise, will most often mean their click growth entry points are at a discounted click value, but eventually, value oozes out, and CPC’s rise to their matured balance.  MBAs would tell us this entry cost is common to businesses growing by tapping into new markets – economically free cash flow is more important than click cost, and strategically market share reigns supreme in expansion areas (the early bird).

  • George Michie

    Interesting piece, Andy, but ultimately I agree with Pat.  Google doesn’t care about monetizing clicks, they care about monetizing impressions.  Serving SERPs is expensive and it is maximizing the revenue on those page views that continues to increase despite CPC declines.  More folks who get to a SERP click on an ad than used to be the case.

    With respect to their own marketing efforts and ultimately their monetization efforts, they face the same law of diminishing returns that the rest of the world does.  As you pointed out search is a maturing space, and while mobile continues to grow the pace of growth has already slowed in the US with the exception of tablets, and tablet traffic is more likely to cannibalize home laptop traffic than smartphones do.

    The Google tree won’t grow to touch the sun.  That said, the decline in growth rates leaves them at a pretty enviable 20% YOY growth, which is not too shabby compared to most businesses.  Last, Google’s ability to generate profit is still pretty astounding.  They could very easily pull back on marketing/sales activities and pull out of some of their less profitable ventures.  They make so much money off of a pretty lean crew (search quality + adwords) that they can post whatever profit number they need to in any given quarter.

  • steppppoS

    Who says GOOG is valued less than AAPL? AAPL’s PE is only 13.55 while GOOG enjoys a PE of 18.
    AAPL’s price has appreciated much more over the last year but they were starting from a much lower valuation than GOOG.


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