Google investors get another gut check

by Mathew on February 28, 2006 · 2 comments

Those Google guys — they’re a nice bunch, and smart as all get out, but when it comes to dealing with investors they could probably use a few tips. For example, when your stock is selling for more than 80 times earnings, and you have a market value of over $110-billion (U.S.), don’t use the words “growth is slowing.” Ever. Why? Because then your share price will get creamed, as Google’s did on Tuesday, when chief financial officer George Reyes did exactly that at a Merrill Lynch conference on Internet advertising (which accounts for about 90 per cent of Google’s revenue).

Specifically, the Google executive was quoted by CNBC as saying: “Growth is slowing and now largely organic… the search monetization gains have now been largely realized.” Did he say that the company was going down the tubes? No. But when you’re growing as quickly as Google has been — and your stock is predicated on that growth continuing — admitting that growth is slowing down even a little is tantamount to yelling “Sell!” Which is what investors did: Google was down by more than $50 or about 13 per cent in early trading, which wiped about $14.5-billion off the company’s market capitalization in a matter of hours (former analyst and tech-stock lightning rod Henry Blodget has more here and also here).

By mid-afternoon, the stock had rebounded to trade at $373, which meant it was only down by about 4.5 per cent from Monday’s close — but clearly some investors were rattled. It’s been a tough couple of months for the search kingpin: although Google’s stock price has come back from its lows of a couple of weeks ago, it is still down by more than 20 per cent from its peak of $475 earlier this year. And Mr. Reyes’ comments didn’t help the rest of the Internet sector either — shares of Amazon, Yahoo and eBay were all down as well on Tuesday.

While the Google exec’s comments may not have been news (at least not to anyone who looked at the company’s financial results from the most recent quarter) they seem to have come as a surprise to some investors. And they could make them increasingly nervous about the stock going forward. As my friend Paul Kedrosky notes, it’s not so much that Google doesn’t give guidance, it’s that they suck at it.

  • http://blog.illuminosi.com Tom Friend

    I remember Steve Ballmer telling a group of analysts in late 1999 that MSFT was overvalued. They promptly dropped the price of Microsoft and it has been flat as a pool of mercury since. I would hate to see a repeat of the dot-gone bust of early 2000, the US economy doesn’t need that right now. IMO, the “Brazil Nut Effect” comes into play here.

  • http://www.plentyoffish.com Markus

    At least they are finally doing something to manage expectations.

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