It's Only 12%

By Dr. Duru written for One-Twenty

January 31, 2006


"Did you hear the news?!?"
"No! What?" "Google's stock fell over 50 points tonight!" "Huh?!? What?!? Noooo way! I told you that company was a piece of junk! All those internet stocks are going right back to zero this year!"

And so the horror will spread acrosss the land. After much anticipation, Google tonight released its earnings report for the fourth quarter. While revenues fell within analyst expectations, the earnings missed by a country mile. I listened in on the conference call to get the story firsthand. Google's executives casually explained that the earnings miss was from taking a much bigger tax hit in the fourth quarter from a change in the mix of their international and domestic operations. If you listen closely, you will hear whispers in the air that all is still well with Google's business. But don't take it from me, read the report or listen to the conference call for yourself.

The headlines of point losses in afterhours trading will sound really scary until you break out the calculator. According to Nasdaq.com, Google hit a low of $358.25 after the earnings bomb dropped. That is a 17% collapse. By the time the panic was closed for the day, the stock sat at about $381 for a 12% loss. No, I do not mean to sound flip. We are talking some $15 or $16 billion in market cap and investor "wealth" here. But I just want to remind you faithful readers not to get lulled into the latest despair. You know that I have written a lot about Google, and I quickly went from bear to bull on both the business and the stock. I realize that the stock is at what seems like a stratospheric valuation, but I have full confidence that once the market gets its "sea legs," Google's stock will try once again to reach the lofty heights that all the analysts dream about. As long as the market chooses to focus on the negatives, I daresay we will see one big sale on Google shares.

If you need any additional ports in the storm, just remember that Google missed expectations that they did not set. In fact, I do not even know why the Google executives affirmed that they "missed" earnings expectations. They do not give financial forecasts, and they did not do so this time around. Now that the bloodletting has begun, the analysts are left to make-up the numbers as they so choose again. I cannot wait to see what they come up with now.

In case you are interested, here are some tidbits I gleaned from the conference call:
  1. Reverse seasonality in UK advertising
  2. Blamed some complex formula with international operations for the abnormally high tax rate
  3. Google network growing a bit slower than Google.com - a trend that has been in place for some time. They are indifferent to which one grows. However GOOG.com has a higher profit contribution {MY COMMENT: hmmm...that's a bit of a concern...wouldn't you prefer traffic to concentrate in the most profitable buckets?!}
  4. International growth is far outpacing U.S. growth and should do so for the foreseeable future - investments being channeled there and a big focus for Google
  5. Made it clear that they are focused and primarily interested in internet-based advertising opportunities...all these rumors about getting into other forms of businesses are references to the "old war." Interested in partnering with traditional advertising, but not in competing directly in the business.
Note well...not a single analyst asked about click fraud, and the Google executives sure did not volunteer any information about it. This begs the question...is this scourge truly a threat to the internet advertising business model or not? Count on further churn over this issue...

Just remember to be careful out there!

DrDuru, 2006