Google shares take a dip
The fundamentals revealed in the Mountain View, California company’s earnings report a day earlier showed the company was solid, gaining market share and raking in billions of dollars in advertising revenue.
It just wasn’t what "the street" expected.
By the close of trading yesterday, Google’s stock price had dropped 7.1% to 401.78 dollars.
"The expectations had gotten too high," said financial analyst Scott Devitt of Stifel Nicoulas and Company.
"There is every possibility that the company is worth more than it is priced at, but it will take time for that to adjust."
Google’s practice of keeping quiet about its internal workings and not making its own financial performance predictions left investors to divine and deduce what to expect of the company, Devitt said. "Google gives no guidance. They don’t talk," Devitt said. "It is tough for analysts. When you don’t have transparency, stocks are much more volatile."
Google’s secretive style worked to its advantage in the third quarter of 2005, when it trounced earnings expectations and the stock price jumped, analysts pointed out.
"Google blew away the most aggressive estimates out there and no one saw it coming," said analyst Jim Friedland of SG Cowen and Company. "It is a stock very hard to track with very little data."
"They don’t give guidance, so the street can’t measure them against their own expectations."
Google’s tight-lipped tendency worked against the company when it underpriced its stock at 85 dollars per share at its initial public offering in 2004, analysts said.
"It was ridiculously undervalued," Devitt said of Google’s IPO. "At this point, it is at the high end of what I think it is worth in the next twelve months."
Investors in technology or Internet service companies are making bets on the future, not making decisions based on current earnings, according to analysts. It is routine for stock prices to drop approximately 10% a day after the market learns of missed earnings targets, said Friedland.
"It is a matter of resetting expectations," said Devitt, who had changed his recommendation on Google stock from hold to sell about two weeks ago.
"If this company continues to dominate and becomes a monopoly in terms of search, I could see why someone would buy. I think the risks are too great."
Investors need to be wary of the effects market competition, potential regulatory moves, lack of information from the company, and problems with "click fraud" may have on Google.
Click fraud is when people click on Internet advertisements with the intention of driving up the cost to advertisers that pay the search engine based on the number of "hits" an ad gets online.
"Going into every quarter, the concerns are the same," Friedland said of betting on Google’s stock.
The biggest concern for Google is if the Internet search market growth slows or plateaus and the advertising dollars it relies on for revenue diminish, Friedland said.
Online advertisers surveyed have praised the effectiveness of Google ads and are "spending more and more, not less and less," Friedland said.
"To me, it is going to be a relatively boring item that eventually hits these shares," Friedland said of Google.
"All shares have their day of reckoning. It is just hard to predict. I go into every quarter wondering if this is going to be it."
Inet-Bridge
Loading ...