The ABCs of Downgrading Google to “Sell”

Two analysts recently dropped Google to a sell rating, one of whom was Scott Kessler of S&P. Granted, a sell rating on Google could be viewed as just as much of a cynical attention-getting move as putting a $2,000 price target on the stock, but in an interview with BusinessWeek Kessler seemed serious, saying the dowgrade had to with GOOG having passed his target price, plus the growing risk:

What are the risks that Google faces?I think investors should know the ABCs of Google risk. “A” is for the absence of material revenue diversification. As good a company as Google is, it still generates 99% of revenue from one source: Internet search advertising.

“B” is for building competition. Yahoo! (YHOO) is investing aggressively in search. It is No. 2 in the Internet search-advertising area and is doing its best to compete. Microsoft (MSFT) is slated to introduce adCenter in the second half of 2006. This will launch the company into Internet search advertising.

We do think that Microsoft’s entry into this category is going to have an impact. In addition, Ask Jeeves, which was acquired by IAC/InterActiveCorp (IACI) last summer, says it will pursue a proprietary Internet search-advertising strategy.

Last but not least is Fox Interactive Media. This was created in mid-2005 by News Corp. (NWS), and includes, which has become an extremely popular destination for teens and twentysomethings. This is not speculation that Fox Interactive Media will pursue Internet search — its executives have said they will do this. The question is how they will do it, either via acquisition or partnership. We don’t expect it to partner with Google.

Getting back to the ABCs of Google risk, “C” is for click fraud. This is relatively unknown to most Internet users and investors. It’s relatively simple. A recent study suggests that up to 30% of online clicks could be fraudulent — meaning not authentic, or not consisting of real users delivering clicks. We’re talking about synthesized clicks by people or a box that automatically rings up clicks that benefit Internet search companies like Google.

We think this problem is more pervasive than people think. We think it will affect advertisers’ taste for Internet advertising and the prices they are willing to pay for ads. And this could have a negative effect on Google.

So, essentially, my downgrade of Google is about valuation and risk. The stock is up 450% since its August, 2004, debut at $85 a share. We think there are notable risks to the stock, and investors should take action based on them.


  1. Adcenter isn’t a threat to Google until MSFT improve their search, all it will do in the current situation is monetize MSFT’s existing traffic.
    Yahoo! need to do better than invest in search, they need to improve the damn YSS interface. It’s light years behind Adwords.
    I wonder how they got the figure of 30%. I spend a lot on Adwords and from my analysis of the logs it is much lower (but of course it may be industry dependent)