Roundup of Reactions to Google's Earnings (GOOG)

Feb. 1.06 | About: Alphabet Inc. (GOOG)

Kevin Delaney, WSJ (paid sub req'd):

[Google (GOOG)] ascribed the shortfall to complicated tax considerations and said its revenue and profit increases were otherwise very strong. The sharp fall in after-hours trading -- the drop exceeded 16% at one point -- illustrated the risks of a selloff for shares carrying a lofty valuation no matter how minor the glitch may be that triggers it. Before the after-hours drop, Google shares were up more than 120% from 12 months earlier. "Anytime a high-multiple stock misses its numbers, momentum investors immediately say 'I'm out,' " said Robert Smith, portfolio manager of the T. Rowe Price Growth Stock fund...

Justin Lahart, WSJ (paid sub req'd):

...Google's stock-market equation has undoubtedly gotten trickier. For starters, Google isn't in the S&P 500. That means a lot of mutual funds with big stakes in Google may slip behind a key benchmark if Google shares fall sharply today. That group could lose patience with the stock. Also, while Google initially attracted a smart set that understood its ability to transform many aspects of the media business, more recently the crowd around the stock has gotten a lot woollier, adding to the stock's volatility.

Ben Elgin, Business Week:

Had the tax rate come in at the expected 30%, Google's profits would have met analyst expectations. Furthermore, with more companies moving their advertising budgets to the Internet, Google will be well positioned to benefit. And its penetration of budding international markets far exceeds that of chief rivals, Yahoo and Microsoft... But with skeptics emboldened by the miss, a new era of Google scrutiny may be dawning.

Saul Hansell, NY Times:

Mr. Schmidt said that in general the company would not change its longstanding policy against providing guidance because "it is hard for us to forecast results quarter over quarter." ...in a modest change, Google did project that its tax rate for 2006 will be 30 percent (compared to 32 percent last year)... "We had a big argument about this," Mr. Schmidt said about whether Google should provide any information to help analysts forecast its results. "It's not fair. We have all these nice people trying to build models, and they can't get them even close to right unless we give them the tax rate."

Eric Auchard, Reuters:

The big miss is bound to raise questions about what Google executives knew and when, and whether they failed to release important information to the market in a timely fashion.

Michael Liedtke, AP:

Substantially higher expenses also weighed on Google's earnings. For instance, the company spent $155 million on sales and marketing during the fourth quarter, more than doubling the $76 million spent last year. The company also hired nearly 700 more workers during the fourth quarter, expanding its payroll to 5,680 employees. Management has emphasized that the company's expenses are likely to rise as it invests in projects designed to improve its long-term competitive position.

Internet Outsider:

The early brouhaha about an "earnings miss" seems a bit exaggerated, because much was attributable to the company's gift of $90 million to the Google Foundation and an unexpected spike in the tax rate. This said, expenses did jump--sales and marketing especially--suggesting that revenue may have come in below the company's internal plan. Despite the marketing juice, moreover, the company's revenue suffered the first real deceleration in a year, and it seems that more lies ahead. Most importantly, for the first time since Google went public, it failed to exceed the Street's printed revenue estimates. This suggests that near-term investor expectations have finally exceeded reality.

Traffick:

Why don't I put much stock in the 42% of revenues generated on partner sites? Three reasons, basically: (1) Google's share of this revenue is much lower than on sites owned by them. (2) This share could drop, and the size of the network could even drop. Disintermediation, essentially, faces any company that facilitates ad placement on sites they don't own. (3) In mid-term, Google's partners can always de-emphasize the Google ads to highlight better-paying ones.

Paul Monica, CNN:

...since the stock is up more than 400 percent since the company went public in August 2004, Google clearly needed to beat the Street again to justify its lofty price. Based on Tuesday's closing price, Google traded at 50 times 2006 earnings estimates, a significant premium to the overall market. Several analysts had thought that Google was worth it because of the company's growth prospects. Google's earnings miss is the latest in a string of bad news for the company.

George Gutowski, Financial Skeptic:

Google reports their tax rate was higher than expected as more costs were allocated to international activities. The press release... left out any financial statements. The company’s own web site... did not provide international segmentation... It's time management breaks this out for all to see. The company laments that the actual Q4 taxes are over 40% but gave guidance for 2006 at 30%... I am skeptical. I should not have to be an international tax expert to understand where this company is going.

Chad Brand, Peridot Capitalist:

The stock just opened down $80 to $350 in the extended hours session. The reason for the EPS miss was a higher tax rate... Had the rate been in-line with estimates, EPS would have beat consensus by a few cents. The company said it expects a 30% tax rate in 2006, so it could be a one-time hiccup and not that big of a deal. I am going long a little stock into the conference call, thinking that the initial reaction might be too violent to the downside after we hear what they have to say.

Michael Eisenberg, Six Kids and a Full-Time Job:

In the call George Reyes, CFO, said "We do not expect to make further donations to the foundation for the foreseeable future." Why are they stopping the donations to the Google Foundation? Is it impacting cash flow too much? Was this donation an earnings management mechanism? ... I have been trying to think through what "for profit enterprises that alleviate poverty" means. Hiring lower income workers and not Phd is certainly one way to alleviate poverty. Cheap food production is another but it is hard to see how that would have the margins of Google's current search and ad business (quick -- short the stock).

Jonathan Thaw, Bloomberg:

Google's report came two weeks after... Yahoo, the second most-used search engine, reported profit that missed analysts' estimates. Seattle-based Amazon.com Inc., the world's biggest online retailer, reports Feb. 2. Yahoo's results showed growth in online searching had slowed. Analysts were split on whether that was good news or bad news for Google. Scott Devitt of Stifel Nicolaus in St. Louis downgraded Google shares to ``sell,'' saying they had risen too far. Robert Peck at Bear Stearns Cos. said Yahoo's report showed Google had been taking market share. Devitt is among three analysts who rate Google a ``sell.'' Peck is among 30 analysts who have a ``buy'' recommendation. Five say ``hold.''

Henry Blodget, Internet Outsider:

Year-over-year growth of Google Sites revenue had been screaming along at 110%-120% for the last four quarters. This quarter it dropped modestly, to 107%. While this was truly a modest drop (and still amazing performance), it came despite the company's having a full quarter of "3 term" instead of "2 term" links at the top of each search page. International, meanwhile, had posted year-over-year growth of 130%-150% for five straight quarters through Q2. Q3 was 120% and this quarter 102%. One likely cause of the deceleration, in my opinion, is market saturation...

ContraHour:

...GOOG will find itself in a giant trading range between $400 at the top and $290 - $320 at the bottom. The bottom is marked by a strong area of support and a gap created from the last earnings surprise. I would expect the bottom range to be tested at some point in the near future, so I'm not looking to buy until the stock cools off some more. The other point of note is that Yahoo (NASDAQ:YHOO) doesn't look nearly so antiquated anymore. I think the market assumed that YHOO was losing share to GOOG and that caused their miss. While I think some of that is true, since GOOG's Adsense is just smoking, GOOG's miss makes YHOO look a lot better. It turns out that the companies should still be considered equals rather than winner and loser.

Ed Sim, Beyond VC:

Google missing its incredibly high expectations is not all that bad because when looking at the bigger picture, Google is still delivering some spectacular results and causing the old guard to get with it and respond to the changing times... it doesn't mean I would buy the stock at these valuation numbers and nor do I own it now...

Amr Awadallah:

...22% sequential growth for a $1919M Q4 is still very impressive, but it missed the expectations and it certainly does not justify the $500 to $600 stock price targets that some analysts are setting. To put things in perspective, Microsoft with a marketcap of $300B did $11B in sales last quarter, that is almost double what Google made for the whole year, so how can Google get a marketcap of $150B (at $500 price target). I think Greenspan had a word for this, let me try to remember, ah, he called it “irrational exuberance