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Google Holds Up to the Heat

Wall Street takes down estimates, but buyers may have found a bottom.
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SAN FRANCISCO --

Google

(SYMBOL)

shareholders are probably longing for the days when its stock was

only

trading at $500.

Ever since a Monday note from research firm comScore showed the number of users clicking on the Internet search giant's paid advertising was flat in January, Google's shares have been tumbling.

On Tuesday, they fell as low as $446.85, nearing its 52-week low before rebounding throughout the week to about $475 in recent trading.

Still, that's below the levels touched after Google missed fourth-quarter earnings estimates -- and a far cry from the $741.79 they hit in November.

But with the evaporation of more than $80 billion of market cap in the past three-and-a-half months, has perhaps come a smaller risk of further downside. Google now trades at about 35 times its trailing 12-months earnings, down from about 60 when the stock first crossed $700 in late October.

While the latest click data has analysts pushing down their estimates for the company, most are sticking to their buy rating, pointing to Google's continuing dominance in the online advertising industry.

And despite Wall Street's tweaks, Google shares held up amid Thurday's broader market selloff, suggesting that a near-term bottom could be in place.

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Mark Mahaney, an analyst for Citigroup, lowered his estimates on Thursday for Google's revenue growth in the first quarter to 8% from 10%, and trimmed his earnings estimate for the year to $20 from $20.50. But he also reiterated his buy rating.

"Based on exchanges with over 40 search industry participants -- including several key SEM (search engine marketer) agencies at this week's SMX Conference -- we do not believe Google's Paid Leads have descended to a No Growth Level," he wrote in his latest research. "There are signs of weakness in Financial Services, Travel and Real Estate, but no signs of material deceleration in other areas."

Oppenheimer cut its price target on Google to $600 from $715, noting that the "material slowdown in sponsored clicks is a serious concern."

At the same time, the firm said it was "cautiously optimistic": "Though Google remains exposed to the downside risk that U.S. sponsored click growth has not bottomed out yet, international strength and possible reversal of trends in U.S. sponsored clicks can mitigate the downside risk."

On Monday, comScore reported that Google's Web search paid clicks -- the company's main source of revenue -- had fallen 0.3% in January compared with a year ago. That was in sharp contrast to December, when paid clicks grew 13% compared with a year ago.

Paid clicks are a measure used by the industry to account for the number of times a user clicks on ad-supported links. Google gets paid by advertisers for each click.

James Lamberti, senior vice president for comScore, says that while his firm stands by the accuracy of its numbers, he notes that the results are only showing one-half of the equation: clicks by consumers. What is likely to drive Google's earnings is the cost per click -- in other words, what advertisers are willing to pay for the clicks.

Lamberti points out that Google has been pulling back on its paid advertising coverage in an effort to minimize accidental or fraudulent clicks. That has resulted in fewer search queries as well as fewer search results with a paid ad presence compared with a year ago.

"Google has been making changes by design and those by-design changes are being picked up in our data," Lamberti says.

At the same time, Google could stand to benefit from advertisers willing to shell out more money for better results.

Lamberti further notes that Google's overall click rate remains unchanged. What's different is the composition of clicks. Whereas a year ago, about 11% or 12% of all clicks were paid clicks, now they're more like 9% to 10%.

Martin Pyykkonen, an analyst for Global Crown Capital, says that investors would be wise to wait and see what happens this month and next in terms of Google's paid clicks before drawing any conclusions about the company's performance.

He adds that Google's stock may now be reaching its bottom, although he stopped short of offering a hard number, allowing for more downside if the economy worsens or if Google's paid clicks fall even further than in January.