“We are concerned about the disintermediation of search by apps and this could impact core search growth. While this is extremely difficult to quantify, qualitatively, we believe that consumers’ increased dependence on mobile and apps is negatively impacting GOOG’s core search.” So begins Macquarie’s “bottom line for 2015” for Google.
Macquarie is the latest in a string of investment banks to strike a note of caution when it comes to Google. Also last week, JP Morgan revised its estimates for Google’s stock downwards, from $670 to $600 per share. (Google closed at $516.35 on Dec. 19.) “We are lowering our estimates on Google for 4Q14, 2015, and 2016 to account for slower organic growth, continued strength in the USD, and ongoing investment opportunities,” analysts wrote in a research note to clients.
Earlier this month, Bank of America/Merrill Lynch downgraded Google stock from “buy” to “neutral,” citing “search maturity, lack of product catalysts, and margin pressure to investments in competitive and long-duration businesses like cloud computing and retail delivery.” Even CEO Larry Page is worried. In October, Re/code reported he would be stepping back from day-to-day operations to focus on the “bigger picture.” (Google declined to comment.)
So what is going on? Google is facing challenges on many fronts. There are three main reasons for worry. First, it is being attacked in search by pretty much everyone. Second, the company has yet to figure out a way to transfer its money-making prowess to mobile, where ads are cheaper and where users tend to prefer apps over browser-based searches. As Macquarie analysts note, “Every query that a consumer conducts through Amazon, eBay, Yelp, OpenTable, and others is a query that does not run through Google.” Finally, Google is facing tremendous regulatory pressures, particularly in the European Union.
And Google’s performance this year has hardly been sterling. The stock is down 8% from the start of the year while New York’s S&P 500 index is up 12%. Facebook is up 46% (see chart above).
Google is not in imminent danger. There remains great opportunity in video advertising on YouTube and in making money from apps on Google Play. Nor is Google going to stop growing or raking in vast amounts of cash from search, even if the speed at which it does so will slow. And according to data compiled by Factset, 84% of analysts recommend buying Google stock right now, versus only 69% this time last year. Then again, Google’s stock price has fallen short of (admittedly traditionally optimistic) analyst expectations for the past two years—and the gap is only getting wider.