In a research note, Chowdhry lays out the case. The gist: The economy is putting pressure on Google ads; users are tuning out sponsored text on the right and competition from Microsoft is increasing. As a result, Google will become more focused on costs, cutting 10 percent to 15 percent of full-timers in 2009 and scrapping plans for a data center in Oklahoma.
Chowdhry in my experience isn't the conservative sell-side analyst type. The overview:
We are reducing our estimates on Google and establishing a new 12 â€" 18 months price target of $270. Our research indicates that the challenging macro-economic conditions continue to worsen Google's advertisement driven Consumer Internet business. Contacts tell us that y-y the number of Keywords are down 2%-5%, bid rates on many keywords are down 20%, while bid rates on a very few keywords were up 5% - 8%. Contacts tell us that Google is benefiting from the shift in ads from traditional media to digital media, however this shift is not sufficient to overcome the downward macro-economic pressures. Contacts also tell us that online users are selectively tuning off the right side of search results, which are sponsored links. This may reduced the number of paid clicks, which in turn may negatively impact Google's revenues. Contacts are seeing Microsoft making progress on the competitive front against Google with its new initiative "Get-IDs", and so far contacts have not seen any competitive response from Google. Internal Conflicts of Interest remains a perpetual problem at Google, which has caused Google to make some poor business decisions. Contacts expect some changes on Google's Board â€" The interests of a VC and shareholders may not always be perfectly aligned â€" said our contact. Contacts expect Google will be focusing on managing the bottom line, which includes further layoffs and canceling a data center build out.The economic argument is well known. Chowdhry has a handy graphic that illustrates the mounting pressure on Google.
It's hard to argue with those pressures or the fact that Chowdhry is cutting Google's revenue estimates. Chowdhry estimates that revenue excluding traffic acquisition costs will fall from $15.71 billion to $15.23 billion in 2009 to $14.57 billion in 2010. Earnings will fall from $19.44 a share in 2008 to $19.24 a share in 2009 to $17.98 a share in 2010. Tech Trader Daily notes that falling revenue would be bad news for Google shareholders, but I find Chowdhry's other comments more notable.
Chowdhry argues that Microsoft is competing more effectively against Google. You'd never know it from the search market share figures, but Chowdhry says that Microsoft is giving paid search credits to ad agencies and forcing Google to match. This pricing pressure could ding Google. Meanwhile, Microsoft is focusing on getting IDsâ€"specifically Live-IDs. The goal is to get these registrations and then leverage these folks as Microsoft rolls out cloud services.
The second item of note is Chowdhry's contention that Google's board will need an overhaul because it's VC heavyâ€"it has two of them on the board now. Chowdhry writes:
At one time Google's Board had three VC's, with the same VC having Funded YouTube and was also on the Google's Board. Two years and $1.6 billion later, we know YouTube is a financial disaster, and we also know that that VC is no longer on the GOOG's Board. However, currently Google still has two VC's on its board, and every acquisition or new initiative that Google has undertaken has been a failure and a financial disaster. This makes us wonder if Google's Board has shareholders interest in mind or are using Google as a platform to promote their VC's agenda, which may not be aligned to the interests of the shareholders of Google.The two Google board members that are VCs include K. Ram Shriram, managing partner of Sherpalo, an angel venture investment company, and L. John Doerr, general partner at Kleiner Perkins Caufield & Byers. While folks may dismiss that final point, I've thought about it a few times. When you connect the dots between Google's green initiatives and Kleiner Perkins' green-tech investments it's not hard to draw a line between the two.