First of all let's look at the numbers. Google (GOOG) earned $9.56 per share on $11.1 billion in revenue, excluding traffic acquisition costs. Including TAC, Google generated $14.11 billion in revenue for the quarter. Analysts were expecting $10.78 per share in earnings on $14.42 billion in revenue, including TAC. Excluding TAC, revenues were expected to be $11.33 billion. So while the revenue miss was not much, Google missed top line earnings by a lot.
The culprit it seems was CPC (Costs-per-click). Advertisers refuse (rightfully so I say) to pay as much for Mobile as they do for desktop adverting. So we have a case of cannibalization to some extent. In fact CPC was less by 6% y-o-y and 2% sequentially.
I am actually surprised the street was expecting a rise in Google's CPC, since the trend has been well established and the CPC issue is well known for some time now.
Microsoft (MSFT) also missed analyst estimates big time. Microsoft reported a Q4 profit of $0.59 per share, compared with $0.75 the street was looking for. Revenue came in at $19.9 billion (an increase of 10% y-o-y), but fell short of analysts' average estimate of $20.7 billion. There was also an embarrassing $900 million charge related to its Surface RT tablet, but that's another article for another day.
Should you buy the dip?
Yes if the dip is big enough. One of the reasons why I give great emphasis on metrics such as P/E, P/B and price/sales, is that these measures of valuation actually mean something. But in this market, they have lost their meaning.
Over and over I see normal, bright, intelligent individuals behaving as if these metrics mean absolutely nothing, because this market has had a good run-up and people have become complacent, and think the market will never correct. How easy investors forget the corrections of yesteryear and the money lost in stocks that were either overvalued or bubbles.
I recommended Microsoft back in November 6 of last year -- when the stock was around $26 -- because I thought the fundamentals then were in investors favor at the time. I have not written a bullish article on Microsoft lately, because the fundamentals are not in our favor anymore. Not that Microsoft is a very expensive stock, but I don't feel comfortable buying a big cap stock with a P/E ratio of 18, especially knowing that PC sales have had their worse year in over a decade. Not that I think Microsoft will tank on one bad quarter, but in the long term, I don't think long-term buy and hold investors will make money. If you don't believe me, ask all those who bought Microsoft at even higher levels over a decade ago.
Google on the other hand has a P/E of 27 and is priced to perfection. Any deviation from what the market is expecting from Google, will derail the current price of the stock as well as the stock's future price trajectory. Personally, I think Google is a prime candidate for an Apple (AAPL) type of correction. I am not saying that it will correct as such, but the possibility alone, means Google is not a candidate for a long-term buy and hold portfolio (in my book).
Should you sell these stocks short?
Yes if you know what you are doing -- especially if you are a short-term trader -- and if you get confirmation of technical weakness on a weekly scale.
Other than that, if someone must absolutely have both of these stocks in their portfolio, I would sell them today and wait for a correction for a better entry point. As far as Microsoft, I would buy anywhere south of $30 a share. Google is more tricky, but to be on the safe side, I would start looking at the stock if we saw a 20% correction from yesterday's close. If not, there are other fish in the sea.