Google is slowing down.
Google’s amazing revenue growth over the last couple of years is mainly due to the fact that they had a vast resource (queries and clicks) that they were not able to monetize for years until they figured out the charge-per-click business model. Google was amazing in how quickly they were able to develop the matching technologies to monetize every single crank of that resource, hence their explosive growth in 2003, 2004, and 2005.
That said, 2006 is showing the early signs of slow down for four reasons:
- Once you have tons of revenue, its hard to keep high Year-over-Year (YoY) growth rates
- The search marketplace is slowing down a bit due to saturation in the US and European markets (still plenty of growth in Asia though, but Yahoo is stronger there).
- Google launched almost all the tricks in the bag during 2003, 2004 and 2005, the only remaining tricks are visual placement tricks and looser matching (i.e. more, less-relevant, ads on top of web results).
- None of Google’s other products, other than web search that is, have decent “money” marketshare. Google’s Image Search is actually pretty large, but they have no ads there (will that change in Q3? possibly).
To further illustrate this point, I show below the YoY and sequential growth numbers for Google’s revenues (extracted from their quarterly announcements). The important trend here is the one for the sequential growth (the blue curve), notice how strong 2005-Q3 was compared to 2005-Q2 (up 14%), that happened due to Google increasing the max number of ads on top of web results to 3 (up from 2).
| Quarter | Seq Growth | YoY Growth |
| 2004 Q3 | 15.00% | 105.00% |
| 2004 Q4 | 28.00% | 101.00% |
| 2005 Q1 | 22.00% | 93.00% |
| 2005 Q2 | 10.00% | 98.00% |
| 2005 Q3 | 14.00% | 96.00% |
| 2005 Q4 | 22.00% | 86.00% |
| 2006 Q1 | 17.00% | 79.00% |
| 2006 Q2 | 9.00% | 77.00% |
Don’t expect this strong growth for 2005-Q3 to repeat again for 2006-Q3, it will be lower, much lower (unless if Google increases the ads above web results or start monetizing one of their other large products). In fact, I expect the summer impact to be larger on Google since they have more share of students and schools.
What do you think ?
– amr
Shhhh! I’m still hoping to sell my shares at $450, before the ‘market’ comes to this realization.
Comment by hackticus — August 1, 2006 @ 8:36 pmTotally agree, the only product that makes G any money is search. So to keep growing revenue, they have to keep growing coverage, CTR and PPC. They’ve already done a lot in all three areas, so it will be tough to find more tricks keep their revenue growing faster than the overall growth rate of the internet.
Comment by gerster — August 2, 2006 @ 2:34 pmIt gets even more interesting when you look at the currency fluctuations to their revenue growth. Since Q305 currency exchange rates have been working against Google, but they still produced enough growth to beat street consensus. Q206 was the first time in over a year that currency helped them.
Keeping currency constant since IPO the Q106 yoy rev growth is 18% (faster than the 17% reported), and Q206 growth is really 8% vs. the 9% reported.
Currency fluctuations typically do not matter to most analysts, but i think the inflection is siginificant b/c GOOG is a growth stock, and the top line is a very very important factor to the stock price.
But whew, revenue to the google.com site is still strong and outgrowing its overall growth rate, right? Not exactly when you dig into it. Google books gross revenue in 2 buckets (organic, affiliate). Affiliate rev comes at a higher incremental margin and is basically like syndication revenue, but is beign pressured b/c of all the competition out there. Organic revenue is the result of the pure monetization of the google.com webpage…. or at least i thought.
Turns out some of that revenue is actually bought and has an accociated TAC with it, if you read their 10q. In other words it is bought traffic. These new distro deals (DELL, ADBE) have a payout overtime back to the partner. Rev is booked in the google line, and the payout is booked in TAC. Margins are still the same, but its clearly trying to boost that google.com rev line, and the perception of an ever growing brand.
Comment by John — August 3, 2006 @ 9:47 amAs you have stated, Google has been doing numerous “tricks” in ad placement to increase their revenue. I wonder why they did not do all the “known tricks” (that Google should obviously know) all at once and instead try to spread it out into different quarters.
I agree with you that Google will have difficulty continuing their sequential growth. But, they just have to announce that they have the “banner product” like Yahoo for the big spenders and their stock price will shoot up regardless of current performance.
Comment by john — August 3, 2006 @ 9:12 pmWhat does the corresponding Yahoo table look like for the past three years?
Thing is: doesn’t Yahoo have more users and more traffic and more revenue streams than Google? Doesn’t Yahoo
have more marketshare in mail and maps and finance and groups and what not? And isn’t Yahoo full
of similarly smart and motivated people who know all these “tricks”? In fact, isn’t Yahoo far more aggressive with
plastering ads all over their services (is there a Yahoo service with no ads?). Then why is it that Yahoo’s revenue,
profit and growth always trail Google?
Could it be that your analysis of their advertising system as a bunch of tricks is a little too perfunctory?
Based on a few personal searches rather than a sustained, substantial, representative sampling of their
query and click streams? Could it be that while you notice a few “tricks” now and then in your own scattered
encounters with google.com, their advertising system as a whole is actually being continuously optimized to
return higher and higher ROIs over all users and all advertisers? Could it be that no individual outside
analyst is ever going to realize this since they usually don’t have the data to support that analysis?
It’s possible, right? Not that I know what’s going on.
Revenue growth is certainly going to slow down with increasing volume. But the sustained lead over Yahoo in
revenue and profit, in spite of having less traffic and users, seems to indicate that this advertising
optimization thing is critical and Google has it while Yahoo doesn’t (yet). Nothing’s stopping Yahoo
from playing all the tricks in Google’s playbook, and more, and yet YHOO trails …
/G.
Comment by gerhardt — August 3, 2006 @ 11:22 pmAmr - Are there any growth companies with revenues that don’t show a similar trend over time, but continue to enjoy share price growth even with steady 15% to 20% revenue growth when they have reasonable valuation multiples. The two things that distinguish Google (and Yahoo for that matter), are 1) it is a $10bn revenue run-rate company with revenues growing still in the high double-digits (if that has happened before in history, I don’t know about it). Also, there are many growth companies with multiples higher than Google’s (at 29x 2007 consensus) with projected growth rates of much less. Starbucks for example. It comes down, of course, to the duration of those earnings, which I know you question.
Of course the only material differences in the prospects for Google and Yahoo that I know of are 1) a bit of a turn-around aspect for Yahoo from the prospective launch of Panama; and 2) a bit of a turnaround in Yahoo’s fortunes in Europe. As a shareholder, I wish Yahoo well in both of these endeavors.
As an outsider and luddite, I’m curious about your assertions re future “tricks.” Why doesn’t this assertion apply as vigorously to Yahoo? I can think of a number of things that both companies will hopefully profit from in the next three to five years that could add duration to their growth: pay-per-call, pay-per-action, location-based search and ad matching on mobiles, video ads on the explosion of video content going online. How do you handicap these? And do Yahoo’s prospects in these areas differ from those of Google?
I suspect that your prodding of Google is more playful than anything else, as your fortunes are fairly tied together. I’d like to hear more informed cheerleading for the industry, which you are in a unique position to do.
Comment by Andy — August 4, 2006 @ 8:20 amWhile I agree with your points, consensus estimates for GOOG already reflect a big slowdown as projected Q306 Y/Y revenue growth is only 14% and down 27% sequentially (the first time GOOG will have seen a sequential decline in revs). This is followed-up in Q4 with 9% Y/Y growth, which gives you full year growth of 15%, down from 92% last year.
Comment by B — August 4, 2006 @ 8:36 amAmr,
Have you looked at GOOG Capex spend over the same period and its Seq & Y-o-Y growth? You will find it instructive,
I agree with your assesment(s) but YHOO & MSFT face teh same issue-eventually;
-Z Biri Singh
Comment by Z B Singh — August 4, 2006 @ 1:42 pmTheir revenue relies on their stranglehold of the search market. With Yahoo and soon MSN too giving them a run for their money, it’s inevitable that the Goog is going to fall off, or ’slow down’ as you so aptly put it.
Comment by Search Big Daddy — September 17, 2006 @ 5:12 pm