Shares tumbled 5.5 percent in extended trade after Google (GOOG) said net income rose to $925 million, or $2.93 a diluted share, compared with the year-ago quarter’s $721.1 million, or $2.33 per share. Excluding one-time items and stock option expenses, Google posted a profit of $1.12 billion or $3.56 per share, which was 3 cents per share short of Wall Street targets.
That three-cent miss led to a $40 selloff in after-hours trading, reducing the trailing P/E multiple from 42x to 38x. Bulls will no doubt argue that the stock is still a high-profitability high growth wonder trading at a market multiple on a PEG basis. But I think that misses some important points.
First of all, the company has beaten estimates by approximately 10% in each of the prior four quarters. Given that track record, it is likely investors were really expecting the company to beat by 10% or about $0.30. So in reality this was more like a $0.33 miss than $0.03. Seen from that perspective the multiple has barely budged despite what is arguably a significant slowdown in the growth rate.
Secondly, with GAAP earnings growth of 25% Google suddenly doesn’t look nearly as special as it used to. Heck, Tempur-Pedic (TPX) gave us 30% EPS growth at half the multiple. So much for exciting tech stocks when geriatric mattresses can top them.
In Google’s favor is the fact that they don’t play any guidance games (though the Street tries to do it for them). So next quarter things could quite suddenly look wonderful again. But this report should give everyone a wake-up call saying they shouldn’t count “forward earnings” before they hatch.
GOOG 1-yr chart: