Google Guts Stock Market

When I saw they were down almost $100 a share in after hours trading yesterday I knew today was going to be a down day for the market. You’d just about need a signed deal ending the trade war with China (allegedly resolved one way or the other within weeks) to get markets back up to par after such a key component nose dives.

  • Google is weighted heavily in key indexes & many tech ETFs
  • Google is seen as a bellwether. If they can’t get the numbers to work out as well as it looked like they would, then many money losing tech startups that are soon coming to market will have people question how they’re going to get their numbers to work.

Google rarely misses, but they stunk up the joint in Q1 by showing a rapidly decelerating ad growth rate, with the YoY rate decelerating from 26% to 17% in the quarter & operating margins falling from 25% to 18%. Google claimed a big part of the shift was due to changes at YouTube:

“While YouTube clicks continue to grow at a substantial pace in the first quarter, the rate of YouTube click growth rate decelerated versus a strong Q1 last year, reflecting changes that we made in early 2018, which we believe are overall additive to the user and advertiser experience,” Porat said on the company’s earnings call Monday.

If YouTube was the main driver of the miss you would expect to see rapidly slowing click growth & increased cost per click. What we saw in the quarter for Google properties was:

  • paid clicks (also includes video ad views): up 39% YoY, down 9% QoQ
  • cost-per-click: down 19% YoY, up 5% QoQ

Ads on search clicks are worth far more than video ad views because there is a lot more expressed intent in searching for a specific keyword than there is in watching a random(ish) YouTube video.

Over the prior 4 quarters Google grew their owned & operated ad clicks about 60% YoY while driving down CPC about 24% YoY. The rapidly decelerating click growth & CPC falling less than it had been would indicate YouTube is perhaps getting closer to ad saturation.

Historically a rising click count at above a 50% rate means massive YouTube ad view expansion, which normally correlates with blended click price being off around 20%. That Google rose their cost per click in the first quarter from the seasonally strong 4th quarter does indicate they’ve slowed down ad growth on YouTube compared against prior quarters.

When the first month of a quarter has an announcement that Google is culling a large partner from their ad network that can be seen as more than a hunch they had a soft quarter & are doing clawbacks.

Prior to the app removals, DO Global had roughly 100 apps in the Play store with over 600 million installs. Their removal from the Play store marks one of the biggest bans, if not the biggest, Google has ever instituted against an app developer. 

Though it also remains to be seen how or why Google needs BuzzFeed News to ensure click quality!

DO Global is a Chinese app developer that claims more than 800 million monthly active users on its platforms, and was spun off from Baidu, one of China’s largest tech companies, last year. At least six of DO Global’s apps, which together have more than 90 million downloads from the Google Play store, have been fraudulently clicking on ads to generate revenue, and at least two of them contain code that could be used to engage in a different form of ad fraud, according to findings from security and ad fraud researchers Check Point and Method Media Intelligence.

Google sending out questionnaires to small businesses about monetizing the hell out of local search is another clue the quarter was going to stink.

The weakness Google showed in the most recent quarter likely has to do with ad load saturation. They could add another ad unit on desktop search results, but key categories like hotels & e-commerce already stack ads via showing multiple different formats. They have also ramped up YouTube ad load a lot over the past year.

Google’s push of programmatic advertising has led to a greater share of their non owned and operated inventory being low quality garbage clicks like the stuff DO Global was offering.

Leading publishers have reoriented their focus to place more emphasis on subscription revenues & less on advertising. And some of the leading destination sites are not only ad buyers but are also becoming ad sellers.

Amazon.com now carries a heavy ad load. They are piggybacking on the install base of Google’s DFP to launch the Amazon Unified Ad Marketplace across the broader web. And then Jeff Bezos also has a sneaky secondary play to further peal off premium publishers from Google. Washington Post’s ARC Publishing has partnerships with the sort of premium publishers Google has perhaps taken for granted:

The software-as-a-service platform may grow into a $100 million business that would bolster the company’s bottom line.

Shailesh Prakash, head of product and information technology at the company, said Arc has expanded its clientele beyond WaPo to include almost every major advertising market in the United States. Its technology powers the Chicago TribuneLos Angeles TimesNew York Daily NewsThe Boston Globe, The Dallas Morning News and The Philadelphia Inquirer.

That gives Washington Post great benchmarking data on their competitors. But it (combined with Amazon’s first party data) also puts them in an enviable spot to launch a premium ad network. I could see them offering the technology free (or rebated to make it free) in exchange for using their ad server. At that point Google gets to have an ad netwrork consisiting of fat thumb misclicks on mobile games while premium advertisers & premium publishers are drawn in closer to Amazon’s orbit.

Look what Amazon recently did in the freight market. Offer a service at no margin to destroy the capacity utilization & economics of an incumbent, and then only after shifting the economics consider making a profit. The ad network equivalent of that is peal off many of the premium publishers while leaving the existing ad network with backfill dreck.

Walmart & Target are following Amazon in ramping up their ad load. eBay is also growing an ad business which will include a CPC aspect. Facebook’s Instagram now has a checkout feature.

With so much selling off it could be the beginning of a bear market, so no harm staying heavily in cash. That said, here are some stock ideas I am looking at…

  • PETS – earlier today Petmed Express was off over 3% in part on general market downdraft, fall of internet related stocks & an ultra bearish analyst call on PetIQ that pulled PETQ down about 15%. As of typing this PETS is down almost 3%. Chewy.com also filed for IPO, so that could have a big impact (hype around IPO could drive PETS higher until some analyst makes a call that Chewy.com will eat everything & downgrades PETS). Petmed Express reports earnings on the 6th.
  • VIRT – if volatility picks up this stock often has a negative correlation to many others, as they are an HFT shop that can scrape more meat off the bones when others are forced to liquidate positions. They were off about 2.5% earlier today & are still down about 1.5%.
  • MMYT – they made a strategic majority investment in corporate travel firm Quest2Travel & were downgraded by Bank of America in the wake of Google crapping the bed – a proper triple lindy. Last week did Ctrip increase their holdings in the company to 49%. They’re off over 10% today, putting their stock right where it was before the Ctrip announcement was made. This stock has low liquidity & sometimes spreads can be a bit wide on it, so it is worth considering a longer term position, particularly if you think the domestic India internet will parallel the development of the Chinese & US internet ecosystems.
  • I don’t follow commodities heavily, but African swine flu is causing big problems in China. Some of the related protein stocks have been strong & are up even on a day like today. Tyson (TSN), Seaboard Corp (SEB), Pilgrims Pride (PPC) & the JBS ADR (JBSAY) might be worth a look & a small exploratory position. Many of them are up about 50% off the bottom from late last year.
  • EIGI – probably has another day or two of decline, but Endurance International Group bombed earnings and lowered guidance. They’re now at fresh 52-week lows & are down over 10% today, so who knows when the bottom will be in. At some point they will be a P/E buyout target as they are trading at well under 1 times sales. Anyone who can come up with any sort of upsells on hosting that they are not doing could drastically expand their margins as they have about 4.8 million active subscribers. Hard to believe they were founded in 1997, have negative growth YoY & are still losing money.
  • Health insurers – if you don’t have any exposure to healthcare yet, these are quite beaten up & the current Congressional hearings are about as rough as it will get provided Bernie Sanders is not elected and/or the Senate does not flip in 2020

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