A Google Bear's Take on Earnings

A few thoughts on Google (GOOG) earnings that were missed by mainstream media:

Google has "blow out" earnings at $4.84 and meets revenue estimates at $5.2 bil. But if somebody thinks that this stock will go back to October Highs - think twice: the company has beat only reduced estimates - just 90 days ago EPS was expected at 4.87.

On our bearish front, signs of further deterioration are all over the recent financial report:

Revenue Growth Q/Q has slowed -50% from 14% to 7%, Y/Y has slowed -33% from 63% to 42%.

EPS growth was 8.7% Q/Q and 30% Y/Y. Yearly growth is still impressive, but nothing out of the ordinary in order to support the bubble valuation. Let's have a look how this level of EPS growth has been achieved. Here is the surprise - welcome to the new reality: gravity still matters even in cyberspace.

Capex has increased to 841.6 mil +24% Q/Q YouTube blades add broadband must be eating hard into the company's margin. Cash Flow from operations has increased only 5% Q/Q.

Our famous metrics of Free Cash Flow multiple is not leaving a lot of roomfor unwarranted happiness: in Q1, FCF was $842 mil.

Now the market will decide what is Google: A new technological frontier changing the universe and "this time is different" - or it is still an advertising company with technology edge in its model?

Its customers and consumers must be living in a virtual world and not facing stagflation: rising prices due to intentionally loose monetary policy and recession in real inflation adjusted output. The most encouraging for this point is Eric's "...Eric reiterated the company has not seen any macro-economic impact." It is still to come...he needs some help to see his dramatically slowing growth and FCF.

If the company will be able to deliver FCF with 5% Q/Q growth for this year and CAPEX will stay at Q1 level FCF will be 4.2 bil. At 30 FCF multiple (our next stop in bearish slide compression) stock should reach Market Cap of 126 bil which will translate into USD397. Any change of heart of devoted shareholders or unfolding another bear leg in general markets and USD350will be seen as blue sky.

The higher the stock goes into this bear market rally the safer a PUT position will be.

Disclsoure: Author is short GOOG

Comments

[woodhorb:]

The title talks about earnings but then you switch to free cash flow? If GOOG profits only grow by 4% a quarter GOOG will meet analysts current estimates of $20 eps in 2008 and $24 eps in 2009; currently a forward PE ratio of just 22 which is not over the top by any means; GOOG management need to keep monitoring CAPEX and not do silly aquisitions but at $45 cash per share they have a lot more cash than most companies; agreed at some stage if youtube does not show promising monetization enough to justify the CAPEX expense you sell the business or close it down and move on

2008 Apr 21 05:51 AM

[PokerDonkey:]

Wow, you've scared me out of GOOG. Not. It's the leader of a growing industry, and no, a 40 P/E isn't a "bubble valuation". Instead of losing billions, it's growing earnings 30% y/y during the current economic state, and it "missed" the OLD estimate $.03 or 0.6%. OMG! The sky is falling!!! Those estimates were reduced because comScore can't count using a consistent methodolgy and the stock price reflected the NEW earnings expectations. If I were you, I'd use today's profit taking to cover my short position.

2008 Apr 21 11:51 AM

[StanleySteamer:]

Hey Sufiy- Your calculation of Free Cash Flow is wrong. The company reported Free Cash Flow of $937.8 M in 1Q08. You maybe right about FCF multiple compression coming in the future and a drop in stock price, but your multiple is off.

2008 Apr 21 01:55 PM

[adan:]

thanks, i like being able to read alternate / corrective / additive analysis of all the money talk companies give during guidance and earnings season; helps a financial layman like me see more than one pov

2008 Apr 21 01:58 PM

[LoveShorting:]

Thanks for giving me a reason to short GOOG (again). Now I know I won't be in there all alone (I know, I can find the % short on Yahoo!)
Even if your numbers are off a bit, you still provide me with room for error.

2008 Apr 21 04:36 PM

[emerbay:]

Dear wrong!

2008 Apr 22 10:05 AM

[emerbay:]

dead wrong!

2008 Apr 22 10:10 AM

[Ames Tiedeman:]

How can you be a bear on GOOG? This goes to 1000 in 2009.
Earnings work!

2008 May 08 10:08 AM