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After CFO's goof, I'm buying Google
Wall Street slammed the stock after Google's finance chief spoke of slower growth rates. The problem, though, isn't what he said, but how he said it.
By Robert Walberg
Maybe Google needs to search for a new CFO.
At the very least, the company and its management team need to better understand how Wall Street works. Earlier today at a Merrill Lynch conference on Internet companies, Chief Financial Officer George Reyes noted in a webcast that Google (GOOG, news, msgs) will have to find other ways to boost revenues as search monetization gains are largely realized.
The stock, up about $4 at the time, plunged over $54 in response to the announcement. The stock had been on a roll -- up about $50 in the last couple of weeks -- in anticipation of Thursdays analyst meeting. Normally, such a warning if it was meant as a warning -- would be preceded by a filing with the Securities and Exchange Commission. This one wasn't.
Fair warning?
It looks as though management was merely suggesting, as it did in a recent quarterly filing with the SEC, that growth in the search business will ultimately slow due to competition and the mere size of the companys revenue base. It doesnt appear as though Google meant to use the Merrill forum to actually issue downward guidance. Note that the company has never given guidance of any kind in the past. If this wasn't a warning, though, management needs to learn how to communicate with Wall Street, as many investors took a beating due to the CFO's off-the-cuff comments.
Related news and commentary on MSN Money
Google was also trying to lay the groundwork for the launch of new products that will add to its revenue base and start to replace some of the growth from search, as that business inevitably begins to slow. Unfortunately, management did a miserable job of communicating that message, and in so doing has lost some credibility with analysts and investors. Google might not want to play the Wall Street game when it comes to guidance, but it needs to be sensitive to the workings of the market.
For investors trying to make sense of todays rollercoaster action, it doesnt appear, in my view, that Google meant to issue a warning. Google was merely suggesting that business in search will slow. That is consistent with the revenue forecasts on Wall Street that have growth slowing from over 100% last year to about 80% in fiscal 2006 and 40% to 50% in fiscal 2007. Most companies would kill to have that kind of problem.
Google is working to tap new sources of revenue. The company looked to be taking a shot at eBays (EBAY, news, msgs) PayPal when it announced recently that Google Account -- its online payment system -- would now be available to sellers on Google Base, the companys classifieds website. There are rumors circulating that the company will use Thursdays analyst meeting to announce a finance site that will compete with Yahoo! (YHOO, news, msgs) finance and MSN Money. Google is also expected to announce a deal with Dell Computer (DELL, news, msgs) in which the formers software will be installed on Dell computers.
Meanwhile, as the company works to expand its revenue base away from search, it should be noted that Google continues to win share in its core business. A report earlier this week from comScore indicated that Googles share of the U.S. search market rose to 41.4% from 35.4% a year ago. Yahoos share slipped 3.1 percentage points, to 28.7%, while Microsofts (MSFT, news, msgs) MSN lost 2.3 percentage points to 13.7%.
Getting back in
In other words there doesnt appear to be any reason for investors to be overly concerned about the companys near-term outlook. Prior to this mornings snafu, the Street was expecting Google to post first-quarter earnings per share of $1.99 on revenues of $1.44 billion. The company earned $1.29 a share on sales of $794.5 million in the same period last year. For the full year, the Street is looking for sales and earnings of $6.55 billion and $8.86 a share, respectively.
Dont look for the Street to make changes, small or large, to these forecasts until after Thursdays analyst meeting. Though analysts werent expecting management to be any more forthcoming with its profit guidance at Thursdays meeting than it has been in the past, the tone will be much different in the wake of this mornings comments.
Analysts will demand more clarity concerning upcoming numbers. Google might not want to share such information, but after misleading investors this morning, the company needs to make things right and provide as much information as possible. Or its credibility with investors will take another hit.
At current levels, the stock is a long-term buy for aggressive growth investors willing to accept the obvious volatility that comes with such an investment. Google trades at about 40 times estimated fiscal year 2006 earnings, and its price-earnings ratio is roughly equal to its growth rate. Traditionally, companies growing three times as fast as the broader market have PE ratios significantly higher than their growth rates.
Ill take advantage of todays confusion and put Google back in my Street Patrol portfolio.
At the time of publication, Robert Walberg was long Google options and members of his family owned Google shares.
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