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Air goes out of Google
(Sacramento Bee, The (CA) (KRT) Via Thomson Dialog NewsEdge) Feb. 2--As recently as Monday, Google Inc. was still the darling of Silicon Valley, the quirky Internet company that could do no wrong and had a stratospheric stock price to prove it.
By Wednesday afternoon Google was licking its wounds after its stock price tumbled $30.88 a share, erasing more than $9 billion in shareholder wealth in a single day.
In between, Google got smacked by the sometimes bewildering Wall Street expectations game. On Tuesday, the Mountain View search-engine operator reported that quarterly profits jumped 82 percent from a year earlier -- but didn't jump nearly high enough to meet investment analysts' lofty expectations.
The news provided a vivid demonstration of what can happen if Wall Street gets disappointed or smells even a whiff of trouble. Investors immediately scurried for the exits, driving Google's stock down 12 percent in after-hours trading late Tuesday. In regular trading Wednesday the stock recovered a bit but still closed down 7 percent from its Tuesday close, at $401.78 a share.
To some industry watchers, Google's stock woes represented business as usual: No matter how well-regarded it is, a stock that falls short of Wall Street's expectations will get hammered. The same thing happened last month to such highfliers as Apple Computer Inc. and Yahoo.
But there was something about Google that caught the eye of average investors, even if they couldn't afford to buy it.
"It's tough for the public to get all jazzed up about Lockheed Martin," said Charles Carlson, an expert on investor behavior and a strategist with the Dow Theory Forecasts newsletter. "But nearly everybody in the world these days uses Google. They know the company and say, 'Gee, that's a cool search engine.' "
Besides, whether they know it or not, millions of Americans own Google -- at least indirectly, through mutual funds such as those operated by Fidelity Management & Research and Vanguard Group.
Now some of the luster is gone. It turns out Google isn't perfect.
"The market is now readjusting itself to a new Google that may not be as consistently profitable" as previously believed, said Rob Enderle, a technology consultant at the Enderle Group of San Jose.
Maybe it was fitting that Google reported its earnings the same day Alan Greenspan retired as chairman of the Federal Reserve. It was Greenspan who popularized the phrase "irrational exuberance" to describe frothy investor behavior, and it could be said Google had benefited from this phenomenon and is now being victimized by it.
Put another way, Google's stock had been bid up to such extraordinary levels that it was almost inevitable that disappointment would follow. "You cannot be on the top of your game all of the time," Enderle said.
As an investor, "you're really setting yourself up for failure," said Joe Milam, president of Roseville money manager Legacy Capital Management Inc. "When you pay $420 for Google, you're almost guaranteed (to be) setting yourself up for failure."
Milam said he avoids Google because the company is so new. "Our style is companies that have been around awhile," he said.
Still, the news represented Google's first significant misstep since its well-received initial public stock offering in August 2004, an $85-a-share IPO that restored some of the glitter to an industry still smarting from the dot-com crash of 2000.
Google shares peaked at $475.11 a share three weeks ago, then started falling, in part because of the company's well-publicized legal battle over the U.S. government's demands for reams of data about its users' search requests.
Then came the fourth-quarter report, in which Google said profits rose 82 percent to $372.2 million, or $1.22 a share. If not for some one-time expenses, including a donation to Google's new charitable foundation, profits would have totaled $1.54 a share.
Wall Street was expecting $1.76 a share, according to Thomson Financial.
The company said earnings were weighed down by higher-than-anticipated tax payments. But investors may have interpreted the results to mean Google's future may not be quite as rosy as first thought, Enderle said.
Influencing investors: Yahoo's earnings, announced Jan. 18, were a penny short of expectations. Taken together, the Yahoo and Google results lend credence to the belief that Internet advertising revenue is hard to predict, Enderle said.
Carlson, though, said he believes investors may be overreacting. The disappointing earnings aren't "the beginning of the end," he said.
Still, it doesn't help that Google, unlike most publicly traded firms, refuses to make earnings forecasts of its own. That makes the stock inherently risky and gives Google less room for error.
"They're on a much shorter leash," Enderle said.
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