Gurgle
On-line search engine Google announced yesterday it earned $372m in the fourth quarter, up 82% from a year ago. This, one might think, would be sufficient to extend the group’s seemingly inexorable rise and fairy-tale relationship with investors. But no. The stock dropped 20% in after-hours trading before rebounding somewhat.
The Wall Street Journal noted “the stock’s naysayers — and there are actually a few — have repeatedly warned of the day when Google would fail to live up to its inflated expectations. That day was today, and Wall Street may never feel quite the same about Google again.”
Apparently a website called Whispernumber.com, which claims to reflect the unwritten expectation of the average Wall Street trader, suggested that Google would earn $1,99. Actually, Google earned just $1,54. “Almost as unforgivably, Google’s revenue only matched forecasts,” the Journal notes.
Google’s popularity and investment case reflects a strange rerun of the late 1990s information technology bubble. As the pop song goes, it’s déjà vu all over again. But in Google’s case, the popularity of the stock has been underpinned by a series of earning outperformances on top of an expansionary business case. Even this below-expectations earnings increase was caused largely by differences between the tax expectations of the company compared with models on which estimates are made.
Apart from being an incredible story on its own, there is also a wider issue. Google does not provide earnings guidance, a policy not only applied widely in SA but also endorsed by investment guru Warren Buffett. The logic is that playing the quarterly earnings game encourages companies to think short term, and subtly enjoins companies to jig their numbers. Some argue it was exactly this kind of quarterly earnings obsession that encouraged Enron to adopt accounting mechanisms that disguised actual earnings.
But providing earnings guidance also provides investors with a more predictable environment and reduces the risk of large, panic-driven stock moves, particularly with highly rated stocks. Currently in SA there is a strong bias against providing earnings guidance, which generally is probably sensible or at least supportable. But with the stock exchange reaching ever-increasing highs, the risks of high volatility are increasing too. Time for a rethink?
Inet-Bridge
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