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Google’s Miss Shocks the Bulls: What’s Ailing the Search Giant?

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Google shocked its shareholders Thursday with a double whammy: the search giant missed the street's expectations on both revenues and earnings for the fourth quarter.

Google reported sales of $8.13 billion, while investors and analysts had expected around $8.4 billion. Net income for the quarter was $2.71 billion, or $8.22 a share, which is up from $2.54 billion, or $7.81 a share, a year earlier. But analysts had been expecting upwards of $10 a share.

The stock tanked nearly 10% on the news in after-hours trading Thursday. In recent trading Friday afternoon, the stock was down 8.4% at $586 a share.

Larry Page, CEO and co-founder of Google, cited weakness in Europe, foreign exchange rates and ad sales for the slower than expected growth.

Many companies — in a variety of sectors — have faced headwinds from Europe in recent months. But Google's fall in ads sales is due in part to structural issues at the core of any business that relies upon on-line ad revenues. Here are two key problems the company faces, as The Daily Ticker's Aaron Task and Henry Blodget discuss in the accompanying clip.

#1: Clicks Up, Ad Prices Down

The number of clickable ads Google sold last quarter was up 34%, but the average price advertisers paid for those ads dropped by 8%.

More clicks don't result in more revenue because they don't lead to more spending by consumers. Therefore, "clicks don't suddenly cause advertisers to spend more money," explains Henry.

#2: Mobile vs PC Search

Mobile search ads are not monetizing anywhere near as much as PC-based search ads. Aaron makes the comparison between TV and web-based ads. TV commercials go for much more money than do ads that run with web-based shows.

Also, just as noted above, "you don't buy more stuff because you can access Google on your mobile phone," Henry says. "So why would that lead to so much more [ad] spending as a result?"

Despite the miss, there is a very silver lining. Google does have a strong underling business. In 2011, the company grew sales a healthy 29% to $37 billion.