There's a famous quote that has always resonated with me: "With great power comes great responsibility." I'm not sure if it was first coined by one of my two idols, President Franklin Roosevelt or Peter Parker's uncle from Spider-Man, but it is one that makes perfect sense. On Wall Street, aside from Apple (NASDAQ:AAPL) there aren't many companies as powerful as search behemoth Google (NASDAQ:GOOG). And when we talk about power, we're talking about growth, something for which the market has an insatiable appetite.
Just to give you some background, prior to going public, Google's earnings growth rate in 2002 was 1,733 percent. Sit back and let that figure marinate for a moment and try to understand what that would mean to Wall Street analysts. This was then followed by more realistic annual growth rates of 138 and 92 percent. When you consider that the "common" growth figure for a stock would be 10 to 15 percent, for a company the size of Google, let's just say that the bar has been set pretty high. With such tremendous growth comes the tremendous burden of meeting Wall Street's growth expectations.
Failure to Deliver
For a company that seemingly has a mission of putting smiles on people's faces, it sparked several frowns recently with its Q4 full year earnings results - prompting its shares to drop 9 percent upon the release and falling below $600. The company reported the highest revenue total that it has ever had in a single quarter at $10.6 billion. This was an increase of 25 percent year-over-year. It seems the concern for analyst was what it reported in net revenue of $8.13 billion versus the expected $8.4. It didn't matter that the company would likely have met expectations had it not been for a deduction in advertising commissions.
The company also disappointed in its profit growth numbers. The concern is that the company is spending too much money by virtue of the 35 percent increase in operating expenses. But it costs money to grow - particularly as Apple and now Amazon (NASDAQ:AMZN) strive to secure the remaining pieces of the mobile devices market. To combat this threat, Google has been on a mission to maintain it leverage by hiring more aggressively, spending more money on its marketing campaigns as well as making several key acquisitions - one of which being Motorola Mobility (NYSE:MMI) last year.
Are There Reasons For Concern?
As indicated above, this was the company's best quarter in its history, yet its stock price took a beating upon the announcement. Amid the increase in operating expenses as reasons for anxiety on Wall Street, another reason for such uneasiness is the fact that Google has been perceived as a risk to itself. Said differently, the company may soon become a victim of its own success by virtue of the tremendous power that it has amassed. Its recent earnings shortfall (if it can be called that), is now interpreted as a sign of further disappoints to come, as the company is not expected to sustain its previous rate of growth.
Another concern is the highly anticipated Facebook IPO. Many analysts expect Google to spend even more cash in the coming years in order to compete and secure what is now perceived to be a dwindling advertising advantage. For a company that has generated over $40 billion in annual sales and has exceeded a double-digit growth rate on its top line since its inception, I think it is a tad disrespectful to consider that it will not be able to make the necessary adjustments despite an increase competition from Facebook and even Microsoft (NASDAQ:MSFT), whose Bing search has overtaken Yahoo (NASDAQ:YHOO) as the number 2 most used search source. The question is, can Google maneuver through all of this and still convince Wall Street that there is nothing to be concerned about? Or better yet, can it maintain its cash flow and still compete with the other tech powers - those present and those that are on the way?
These are realities that the company understands and is working diligently to address. But the idea that the Google is now somehow dying is not one of those realities. The fact of the matter is, in the search-based advertising market, the company is expected to have a sizable market share for the foreseeable future - to the tune of 70 percent. Skeptics should not make the mistake of discounting the growing mobile advertising market - an area where the company is projected to earn revenues of $10 billion over the next 5 years. The company has tremendous power indeed; regardless of the pressure that it comes with, it is far from ready to relinquish it to anyone else.
Disclosure: I am long MSFT.