BUSINESS BLOGS
BUSINESS BLOGS
category: business
23 Jan 2008

2007 darling Apple got hammered yesterday despite strong financial results. The problem was it failed to beat expectations (at least what analysts were expecting) and more importantly, its guidance was paltry.

The stock - which crossed $200 per share just recently - is now off 16% or $25 and sitting at $130. Is it a buy? I don’t know. But Apple’s softness today (understatement of the day) is prompting some to ask if more tech companies will get hurt.

Yahoo! (whose stock I own) is being decimated. Yahoo! - despite all that it has going for itself - is worth $25B, and this includes investments in the fast-growing Asian market by way of Alibaba and Yahoo! Japan. I’ve long argued that Yahoo! can’t go much lower, but it can head higher (mind you, I also never expected Yahoo! to be this low).

But Google has always faced considerable downside risk. How low could Google go. Bear in mind I’m the same guy who’s penned “Will Google Surpass MSF’s Market Cap by 2010?” so I think the market is overly pessimistic now, which is normal.

But is Google at risk for more downside? Long term, no. Online advertising maintains momentum and Google continues to dominate in search… though investors should take this opportunity to realize that so long as Google remains a one-trick pony and it edges closer to 100% market share, its upside will become capped - even if search advertising continues to grow. The reason is not that Google will fail to do well, rather, like Apple, it won’t be able to surpass expectations nor will it be able to push up expectations for forward earnings.

But short term, is there more negative news? It’s hard to tell. Just a couple of months ago investors were bidding $750 per share for Google. Yet today, they’re only paying $550 per share? Frankly, digital media is better positioned than ever, and Google has not changed, has it?

The main risks I suspect are two-fold:

- Google has over the years began to generate more revenue from larger Fortune 500 advertisers, but Google’s bread and butter are individuals, small and medium sized business and mid-sized online advertisers. These will probably continue to spend their budgets online but since they are ROI-oriented, a downturn in consumer spending will cripple some of their desire to advertise. Over time they will need to advertise more, but over night, if conversions fall, they will scale back advertising. I do not think this will actually be material though.

- Financial advertisers have certainly scaled back advertising, but financial advertisers fall into two camps: big advertisers that are more mainstream (Amex, for example) that sell everything and have probably continued to advertise aggressively. Even advertisers like eTrade and Waterhouse would maintain budgets because “there’s always a bull market somewhere” so people will continue to trade. However, advertisers that were focused on mortages will surely scale back.

If you look at online advertising, you will see that financial marketers generate 5% of online spending.

While Google is a pretty good barometer of the Web, it is not representative of online advertising.  For example, I suspect Google’s intake from financial advertisers is much more than 5%, say twice that, or 10%.

Suppose a portion of this comes from the more mainstream advertisers such as AMEX and eTrade and what not, and another portion comes from mortage-focused advertisers.

However, I suspect that in recent years the mortgage advertisers tipped the scales and were overweight in their contribution to Google’s top and bottom line.

If that is the case, and those two variables rule one another out, then it is very possible that Google “value-at-risk” over mortgage-oriented marketers was 5% at the lowest, probably 10% and at most 15%.  That is a big number, admittedly, but Google has fallen $200 in a relatively short time span (or 26%). That more than compensates for the 5-15% exposure… but investors are not rational, especially when panic sets in.

Note: I have no position in Google but you should talk to an investment professional before making any move, or any stock. This is only for entertainment purposes.