Google will miss expected earnings numbers tomorrow (IMO). There are two recent “shoot your own foot” actions from Google that may affect their short term performance. Overall, I agree with the changes, but I wouldn’t be swinging into earnings tomorrow.
(1) Google changed the “hit area” of their AdSense ads. Before the entire ad area was clickable. Now just the heading and url are.
There are mixed reports on whether or not this is affecting overall click through rates (CTR) and earnings. On InvestorGeeks, our CTR went from 2-2.25% in September and October to 1.25-1.5% in December and January. Our overall earnings are down 40%.
Most of Google’s revenue comes from their own search page which likely had smaller drops (if at all). But if other sites have had slowdowns like we have, this would eat into Googles earnings growth.
In the long run I think this is a good move, as it will cut down on fraud… eventually leading to more advertisers and higher ad rates. In the shot term, however, folks are taking a hit.
(2) A recent update to Google’s PageRank (PR) algorithm drops the PageRank of many sites, fraudulent and otherwise. For legitimate sites, this is almost a kind of PR inflation. InvestorGeeks PR dropped 1 point, but our Google traffic has remained fairly stable. However, the change undoubtedly hit many spam blogs and other parked sites that had lived off of paid links.
Again, this is good for all of us. And good long term. However, short term, many sites that gamed Google to get more traffic are getting less traffic now. And nearly all those sites monetized wth Google AdSense.
We have the same disclaimer that this change didn’t effect Google’s core earner… the paid links on their own search results. However, AdSense has accounted for around 33% of Google’s earnings in the past (Motley Fool).
The Invisible Earnings Lever Could Save Everything
One caveat to all of this is that Google doesn’t publish what percentage of AdSense earnings go to publishers and what percentage they keep. They could adjust this number at will… basically, giving them an invisible lever to allow them to quickly tweak their earnings in any given quarter.
Who knows if they are (or would) adjust these percentages to hit earnings? However, it’s possible they could adjust for a 10% loss due to 1&2 above by simply taking 10% more of the pie.
Again, long term, these are good changes. Google is growing like a beast and taking more and more share of the search market. I’m very bullish about the company as a whole and think the depreciate price is a good one. I’m long 5 shares myself.
However, I wouldn’t add to a position or open one going into earnigs tomorrow. We’ll see.