Google once again demonstrates its exceptionally innovative power, as we have discussed in other posts, by stunning analysts with its greater-than-expected 30% increase in its first quarter report. Google’s share price in after-hour trading jumped 17% to 525.96 last Thursday night. Again, this demonstrates how important people are, as assets of a company.

Before this news broke, analysts worried about the “paid clicks,” or the number of times users click on Google advertisements and its affiliated websites slowing down. Among these critics, the loudest warning voice came from Comscore (Nasdaq: SCOR) whose share price slipped 8% because of Google’s unexpected good news. People now question the accuracy of Comscore’s survey, on which it based its cause for worry.

Google’s explanation of its success rests on the fact that more than 50% of its business is conducted outside of the US, which it says attributes to its ability to withstand a slowdown in US economy. Google achieved more than 20% growth in clicks worldwide last quarter.

In my view, Comscore might not be wrong. The paid clicks rate has dropped overall. Google’s growth in paid clicks was 30% in Dec 2007 and 45% in the preceding quarter. Obviously, there is a trend of slowing down. But the paid-click rate represents only one factor of paid advertising. The other factor people often overlook is the price per paid click.

Google does not have a standard price list for its pay-per-click Google Adwords program. It uses an auction model to determine pricing, where advertisers bid for “keywords” they use their advertisements, that they would like to appear in Google’s search results and its affiliated websites. The more competitive a keyword is, the more expensive a click could be. With some popular keywords like “web hosting,” the charge per click could be as much as several dollars.

In my experience using Google Adwords, there is a solid growth trend in the average per-click price of keywords in the past few years. With some of the popular keywords that I use, I have noticed that the increase in price is as much as several hundred percent within a three-year time frame. It is increasingly difficult to find effective keywords that are “cheap” now.

This can be explained by the fact that more and more businesses are entering the market, using online advertising media to promote their products and services. In the past, small business owners were the major players in this market. But now more and more big guys are coming in. More competition for keywords drives up the per-click price, and that helps to compensate for the drop in growth rate of number of clicks.

And Google makes continuous efforts to combat click-frauds and click-arbitrage by some website affiliates, by refining its Google Adsense program. This effort pays off in improving the quality of leads brought to Google customers. Advertisers are more willingly to pay for the clicks if the customers are of good quality. This also explains the increase in Google’s average paid-click price.

In my view, the recent setbacks of Google’s share price are largely due to the general market sentiment. Google’s value is not totally reflected in its current share price.

To invest in a company, you need to consider the market, the industry, and the company’s management. As far as the industry goes, the online advertising industry is still budding and there is a lot of room to grow. As for the company, I always opt for Google’s exceptional management team that can attract and retain smart people to knock down its competitors (read my post about Microsoft Acquires Yahoo!). And with its ability to withstand the recession in the US economy (as proven by its first quarter results), it seems that Google is very likely to keep its momentum going in the coming years.

Tags: Google first quarter results

Tags

Google, Google AdSense, Google AdWords, Keyword Marketing, Pay-Per-Click