Google’s share price slumped during after hours trading after the company missed Wall Street expectations in its latest financial results, except the company’s founders.
Google Inc.’s market value dropped by more than $9 billion as investors bailed out of the Internet’s leading search engine after earnings letdown reminded them about the perils of owning stock in a company that refuses to provide financial guidance.
Co-founders Larry Page and Sergey Brin have always insisted they will run their seven-year-old company the way they want, even if it means ignoring stock market pressures to hit a widely watched earnings target.
The Mountain View, Calif.-based company’s stock price plunged by as much as 10 percent before rebounding slightly as Wall Street digested a series of analyst reports that continued to predict a bright future for Google.
The shares closed on the Nasdaq Stock Market at $401.78, a decline of $30.88, or 7.1 percent.
The recently released report of fourth-quarter earnings that badly missed analyst estimates will test their defiant attitude, along with investors’ affection for the search engine leader.
This shows that Google is not impervious; Standard & Poor’s analyst Scott Kessler said.
Having seen Google’s share price rise fourfold in 16 months, analysts have begun to warn that there may be some discrepancy between the company’s stock market value and the value of its business. However the relatively poor results are not seen as grounds for concern. Google is not losing market share to its rivals and has doubled revenues over the course of the past 12 months.
That realization rattled previously bullish investors as Google’s stock price plunged $30.88, or 7.1 percent, to close at $401.78 in trading on the Nasdaq Stock Market. The downturn wiped out more than $9 billion in shareholder wealth and trimmed about $2 billion combined from the net worth of Page and Brin, who are both 32.
At one stage the price had fallen by 19 per cent, wiping $20bn off Google’s value after quarterly earnings were 13 per cent less than predicted. Until now Google has performed spectacularly since going public in 2004, exceeding expectations by at least 10 per cent in every quarter.
The issue was Google came in line, as opposed to having a blow-out quarter, analyst Martin Pyykkonen of Hoefer & Arnett in Denver told Reuters. As far as anything deteriorating or market share loss or Yahoo! is being stronger and Google not being as strong, none of that seems to be the issue here.
The Mountain View, Calif.- based company, which went public in August 2004, said its net income nearly doubled from the previous year to $372.2 million during 2005’s final three months.
The stock price is now 15 percent below its record high of $475.11 reached just three weeks ago but the shares remain a golden investment for those who bought at $85 in an August 2004 initial public offering.
Although an abnormally high tax rate accounted for the shortfall, the quarter nevertheless served as a sobering reminder that even high-flying Google is governed by the laws of financial gravity.
Google’s earnings miss stems mostly from lofty expectations. Wall Street projections became too optimistic, partly because Google won’t help analysts crunch their numbers as most high-tech companies do.
Google co-founders Larry Page and Sergey Brin have vowed not to forecast the company’s earnings because they worry about becoming caught in a trap that will require them to focus on short-term profits at the expense of what’s best for the long haul.
In each of Google’s first five quarters as a public company, its earnings exceeded analyst estimates by at least 14 cents per share. On Tuesday, Google’s earnings were off by 22 cents. This time around, the earnings bar may have been set unrealistically high, although Google’s poor tax management did not help, said Pyykkonen.
Why cannot they forecast their tax rate better? he said. Google has predicted its tax rate will decline this year but Pyykkonen advises investors to take a "wait and see" approach.
Even if Google had not been dragged down by higher taxes and simply matched analyst estimates, its stock price still probably would have shriveled because investors had anticipated even bigger things.
Google’s so-called "whisper number" – a reference to the earnings figure circulating among short-term investors – had been $1.99 per share, according to Whispernumber.com, which compiles the data. The fourth-quarter earnings came in at $1.54 a share.
A lot of the luster has been lost with the first earnings disappointment, said American Technology Research analyst Rob Sanderson. The stock is coming back down to Earth, and that is probably healthy.
But Sanderson and Pyykkonen doubt Google is going to waver from its position. In various interviews, Google executives said the company has no plans to provide earnings guidance.
They still have a sense of obligation to shareholders, Sanderson said. They are not totally dismissive of Wall Street. For the most part, analysts continue to recommend Google’s stock, reasoning that the company’s search engine remains the best vehicle for capitalizing on the booming online advertising market.
Having built the Internet’s largest advertising network, Google is churning out profits at a rate that outstrips other big moneymakers, like the oil industry.
In the fourth quarter Google earned $372.2 million on revenue of $1.9 billion – a 19 percent profit margin. During the same period, Exxon Mobil Corp. earned $10.7 billion on revenue of $99.7 billion – an 11 percent profit margin.
Bullish analysts like Piper Jaffray’s Safa Rashtchy believe Google’s best is yet to come as the company figures out ways to make money from a long line of new products such as its recently introduced online video and listings services.
We encourage investors to aggressively build bigger positions in Google, Rashtchy wrote in a report that reiterated his belief that the company’s shares will climb to $600 by year’s end.
Despite many misgivings, UBS analyst Benjamin Schachter remains optimistic about Google’s long-term prospects. This is not a broken story, he wrote. "One quarter’s results do not change our belief that Google, the company, will continue to innovate and grow rapidly."
He set a new stock price target of $425, down from $500 previously.