Paid Click Growth Bodes Well For Google

In my recent write-up Why Google Will Deliver Upside to Analysts’ Estimates, I noted that the Credit Suisse analyst Spencer Wang is estimating 8% YoY growth in paid clicks for Google in 4Q, down from 18% in 3Q. My work at the time had suggested 12% YoY growth in paid clicks.

A recent note by Jeffries & Co. analyst Youssef Squali stated that Oct and Nov domestic paid clicks are up 13% YoY, citing data from comScore. However, the analyst is forecasting an 18% YoY growth in global paid clicks for the full quarter due to faster growth in paid clicks outside the U.S., a better than expected pick-up in eCommerce activity in December, and paid clicks from the network sites. The first two I agree with but the last point maybe misplaced given continued efforts to cleanse the network, which would lead a lower growth in paid clicks from the network sites. The analysts thinks that his growth estimate could be exceeded, essentially calling for an acceleration in paid click growth, an extremely bullish view.

I think his growth estimate maybe a bit aggressive and the true estimate could lie between 12-15%, up from my prior estimate of 12% YoY. The biggest boast will likely come from international, which saw paid click growth in the high 30% range in 3Q compared to the 10% comScore predicted for domestic in 3Q. However, my work has suggested that the U.K., will likely be the achilles heal in the quarter due to a slumping economy, and will exert significant pressure on international paid click growth.

So while the acceleration in the paid click growth on the domestic google.com site estimated by comScore is a strong positive (13% YoY thus far, vs. 10% YoY in 3Q) it is likely to be offset by slower growth internationally.

Nonetheless, given that several analysts (except Squali) are predicting paid click growth in the single digits, trends thus far are reinforcing and bode well for Google and the stock.

Full Disclosure. I have a position in Google.

- TMT

From Jeffries & Co. Analyst Youssef Squali
• Ad coverage report from comScore for Google (GOOG, Buy) shows
a m/m acceleration in searches, with paid ads in Nov. growing at
22.4% Y/Y vs. 10.9% Y/Y growth in Oct.

• Ad coverage (i.e., percentage of searches with paid ads) also
showed an increase, growing 460bps m/m to 43.7% vs. 43.1% in
Oct (ref. exhibit 1).

• Based on our proprietary regression methodology using historical
paid search data, we believe that Google's paid clicks were up
~16% Y/Y in Nov. vs. ~9% Y/Y growth in Oct.

• We believe the Google's click growth is likely benefiting from the
following a) increased searches (and clicks) by budget-constrained
holiday shoppers and b) an increase in ad placement from a m/m
pick-up in e-commerce as well as mgt.'s attempts to tweak ad
coverage.

• For 4Q QTD, Google's domestic paid clicks are up 12.6% Y/Y vs.
10% Y/Y in 3Q. Globally we estimate a Y/Y growth of 18% for 4Q,
which we believe is achievable (and potentially could be exceeded),
given that comScore only tracks domestic paid click data, not: 1)
paid clicks on Google's international properties (up ~40% Y/Y in 3Q
vs. 10% growth in US by our est.), 2) paid clicks emanating from
the Google network, or 3) pricing trends (i.e., monetization).

• We expect Dec. paid clicks to remain healthy and also benefit from
a post-thanksgiving pick-up in e-commerce (up 1% Y/Y Dec.1-19
vs. a 4% Y/Y decline in Nov.)

• Bottom line, remain positive on Google's search business, given a)
resiliency in paid clicks in a tough ad/e-com environment, reflecting
search's superior ROI vs. other ad channels and b) Google
continued market share gains (60bps for Oct. and Nov. combined),
accompanied by a robust query growth (up 32% Y/Y in Nov. and
29% in Oct))

• At $297.11, GOOG is trading at an EV/EBITDA of 7.4x and P/E of
14.0x on our FY09 estimates. Our $420 PT is derived using a
five-year DCF model. Risks include sharper than expected impact
of the economic slowdown and/or a protracted downturn, run-away
capex and execution on non-search initiatives.