Online Ad Growth May Be Losing Momentum

Internet Giants' Latest Financial Reports Not as Spectacular as Wall Street Expected

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SAN FRANCISCO ( -- Just three months ago, it seemed as though the internet advertising industry could get through this tough economy relatively unscathed. But in what may be a bad sign for a seemingly recession-resistant sector, several internet companies have reported relatively disappointing earnings.

The giant in the space, Google, didn't grow as fast as analysts expected, and its shares dropped about 7% on the news. It reported net income of $1.25 billion, or $3.92 per diluted share, up 35% from $925 million, or $2.93 per diluted share, during second-quarter 2007. Of course, Google doesn't offer financial guidance, so there's a greater chance investors can be caught off-guard.

The company continued to milk the stronger international economy, which accounted for 52% of total revenue, up from 51%.

Google spreads the blame
Despite the troubles, Google executives didn't blame the economy or weakness in the online advertising sector, instead attributing the company's less-stellar-than-hoped-for performance primarily to financial moves and a bit to costs related to its acquisition of advertising service DoubleClick. However, signs from other companies, such as display-ad-heavy ValueClick, indicate the economy is having an effect on the sector.

ValueClick announced it was paring back its second-quarter guidance. The company now estimates growth will be in the low-single digits for 2008, compared with the first quarter's 17% growth. Display and comparison-shopping business was proving particularly weak.

"Against a deteriorating macro-environment, online display advertising is being materially impacted, much more so than performance-based search advertising," wrote Citibank analyst Mark Mahaney. "We believe [ValueClick] is seeing display-ad weakness across almost all verticals." Such news, he added, could have negative implications for a company with a heavy display business, such as Yahoo.

Microsoft's mixed signals
Microsoft's stock price fell about 6% after it reported somewhat disappointing profits today for its fiscal fourth quarter. Revenue at its online services division, which includes its ad-sales operation, grew 24%, but the division still lost money, $488 million, in the quarter ended June 30.

EBay's shares tumbled almost 14% today amid evidence that consumers were reining in spending. The value of goods sold through eBay rose only 4%, and CEO John Donahoe blamed economic woes. EBay is one of Google's largest advertisers.
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