Being that I am a Marketing professional in the financial sector, I have information that might be interesting to the analyst community regarding the online search business.
As you are aware, Google (GOOG) and Yahoo (YHOO) have cashed in big time from the mortgage boom. Direct lenders, conventional banks and lead aggregators like Lending Tree, Nextag and LowerMyBills.com have all paid top dollar to drive online traffic to their site. Keywords like mortgage and refinance have gone for as high as $20 to $30 per click during peak times.
The spate in the mortgage business started last year with interest rates rising, ARM's resetting and consumers starting to default heavily. This was the tipping point that had a lot of real estate and mortgage investors worried. This year, the problem has been exacerbated further with HSBC's (HBC) recent announcement regarding a jump in delinquincies, New Century's (NEW)similar woes and Novastar's announcement just earlier today regarding no taxable income for the forseeable future. And all this amidst Wells Fargo's (WFC) announcement about job cuts in their sub-prime division, H&R Block's (HRB) planned sale of their wholesale mortgage business unit and Ameriquest's many many issues.
So how does all this mortgage news affect the Online Search business? Its quite simple really. Mortgage companies including the ones above have all been heavy contributors to Google's coffers. Yahoo too, but not as much as Google. Now for the good stuff. One of the lead aggregators that I happen to know, that was selling leads to mortgage companies for almost $50 per lead, recently dropped prices drastically by 80%. This means that they are either losing money on every lead they sell (I think not), or they are acquiring these leads for much cheaper (Yes!). And surely, this company couldn't acquire very many leads by bidding low for mortgage related keywords. So the only logical explanation is that lenders and aggregators across the board have dropped their bid prices by up to 80%, which ultimately affects Google's bottom line.
Obviously mortgage companies are not the only advertisers on search engines, but over the last couple of years, I can imagine them to be the more aggressive bidders. The impact of this to Google's earnings will be significant and will probably show up in their Q1 earnings for the U.S. markets, although its anybody's guess what percentage of Google's business comes from this sector.
So while I am a long-term bull on Google, and one of my first predictions on this blog almost a year ago was that Google will be at $800 within 4-6 years still holds true, I am short-term bearish on the stock. For long-term investors, its an opportunity to buy at pull-backs.
-- Faisal Laljee
Full Disclosure: I own GOOG but my position can change anytime without notice