Will Google grow at this rate forever? No? Then DIE!!
Today was a moderately exciting or irritating day to be a investor in public technology companies. Google’s CFO, George Reyes, apparently forgot that he was webcasting to a public group of investors rather than conferencing with an in-house team at the Googleplex during the Q&A session at the Merrill Lynch Internet, Advertising, Information, & Education conference: (Yahoo/AP News)
Q: Looking back to Q3 2005, was there anything in there that was maybe sort of one-time in nature that accounted for such strong revenue growth…?
A: So we went through a period of probably 18 months where we thought we had…well, let me characterize it…we had what was called a RevForce initiative–Revenue Force–which was really a team of really very bright technical engineers that were trying to tweak and optimize the ad system, and not–you know in very very responsible ways [Don’t Be Evil!]–and that sort of paid off nicely with the fruits of that labor.
And what’s happened since then is that we got so good and so efficient at that back then that really most of what’s left is just organic growth, which means you have to grow your traffic and your have to grow your monetization.
But so, I think, we’re now, clearly our growth rates are slowing. And you see that each and every quarter. And we’re going to have to find other ways, you know, to monetize the business.
Later in the Q&A there’s something about the “law of large numbers” ultimately limiting growth due to running out of people to look at advertising. These are high class problems to have, and these sound like perfectly intelligent comments for an internal coffeetalk or private discussion. But when your stock is trading at 72x earnings, it’s a bad thing when the CFO says “growth is slowing” to a room of investors looking for extreme growth. The response is going to be “shoot first and figure it out later”, which is what happened this morning.
Reminds me of a scene in Ghostbusters:
Gozer: Are you a God?
Ray: No.
Gozer: Then — DIE!!
Winston: Ray, when someone asks if you’re a God”, you say YES!
How big is the growth rate? Pulling some data from Google’s IR site, this graph shows GOOG’s quarterly gross revenue growth for 2003-2005. The maroon line is Adsense sites, the light blue line is for Google-owned sites, and the dark blue line is the total.
One simplistic lower bound for future growth at Google would be to assume that it tracks the overall growth of internet use. I’ve inserted an additional blue line just above 4%, which is a rough estimate of the overall growth rate of the internet. I haven’t tried to find detailed data, this is from Jakob Nielsen’s Alertbox, which cites an 18% annualized growth rate from 2002 through 2005.
“We are getting to the point where the law of large numbers start to take root,” Reyes said Tuesday. “At the end of the day, growth will slow. Will it be precipitous? I doubt it.”
Google issued a press statement late in the afternoon:
As we have stated before, monetization improvements will continue to be a key factor in driving future revenue growth. We still see significant opportunities to improve monetization and intend to continue to focus our efforts in this area.
Moreover, as we have stated in our SEC filings, our revenue growth rate has generally declined over time and we expect that it will continue to do so as a result of the difficulty of maintaining growth rates on a percentage basis as our revenues increase to higher levels.
Hey, how’s that GBuy project going, anyway…
Webcast of the conference presentation (registration required)
Henry Blodget has a number of interesting posts on Google, including why he doesn’t own it, approaches to valuation, the most recent earnings, and today’s adventures.
The Google analyst day coming up this Thursday should be pretty interesting. Might be worth trying to catch the webcast. Bet George is getting some extra practice in.
Tags: google, internet, finance, investing, business, stock
