Google Shares Plummet After Disappointing Earnings

SAN FRANCISCO — Google Inc. shares plunged nearly 10 percent Friday after the Internet search leader's second-quarter earnings missed analysts' expectations.

Management said economic turmoil in the United States and parts of Europe appears to be causing consumers to click less frequently on the ads that generate virtually all its profits.

That unnerved already jittery investors, although Google managers said they expect the Mountain View-based company will thrive even if the economy weakens further.

Google's stock price dropped $52.12, or 9.8 percent, to finish at $481.32, leaving it below $500 for the first time in three months.

The red flags raised after the bell Thursday included a dramatic slowdown in the company's hiring pace and Google Chairman Eric Schmidt's description of the economy as "challenging." Google's chief economist, Hal Varian, even participated in the company's conference call for the first time to discuss business conditions.

"That was a tip-off," said Cantor Fitzgerald analyst Derek Brown. "Economic sluggishness has entered the discussion at Google, more so than we have ever heard."

Google earned $1.25 billion, or $3.92 per share, during the three months ended in June. That represented a 35 percent increase from net income of $925 million, or $2.93 per share, at the same time last year.

If not for costs incurred for employee stock compensation, Google said it would have earned $4.63 per share. That figure missed the average earnings estimate of $4.74 per share among analysts surveyed by Thomson Financial.

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Google's second-quarter revenue fared slightly better than earnings, rising 39 percent to $5.37 billion from $3.87 billion at the same time last year.

More than half the revenue _ $2.8 billion _ came from international markets, helping to offset some of the economic weakness in the United States.

After subtracting commissions paid to its ad partners, Google's revenue totaled $3.9 billion _ about $30 million above the average analyst estimate.

Stanford Group analyst Clayton Moran interpreted the performance as "confirmation that there is a slowdown in Internet advertising that's affecting Google."

The trouble may stem more from reluctant consumers than advertisers.

The number of paid clicks on the Web sites operated by Google and its partners during the second quarter fell 1 percent from the first quarter, the first sequential downturn that the company has ever reported in the category. The 19 percent year-over-year increase in Google's paid clicks also was the company's lowest ever.

"Consumers are being cautious in their online spending patterns, just as they are in their off-line spending patterns," Varian told analysts during Thursday's conference call.

Comments

[nogimmicks]

Google search engine was useful. The long term bottom value of Google long term is zero. Most of their programs can be written by a couple of unpaid teenagers. Selling advertisement is a legitimate business though, but a P/E ratio of 32 while GE trades at the P/E of 13 is not justified. I guess the stock is about 2 times overpriced now.

[styleturn]

GM created a stir because it temporarily stopped it's dividend. That would be expected to effect the value of the stock. Citigroup lost money but still provides a per share dividend. In both cases shares can vote.

Google's stock dropped more or less because they missed their profit estimates. Since they aren't paying a dividend, a more interesting question probably is why do stock holders care how much the company makes? The purchased stocks can't vote and the investors don't share in the profits. If Google makes more money or less money the stock returns exactly the same value until sold. So why is there any value to Google stock outside of some techno-geek factor?

So the open question is why should there be any connection between the amount of money Google makes and the value of the stock?

[KillTheMessenger]

Any corporation that does not at least double its earnings year over year needs to be removed from the stock markets. We can not tolerate losers who can only manage to grow 35% annually.

:-)

In other words: American investors have totally lost it. This is not investing any more, it looks like a case of mental illness.

[beaucoul]

the bloom is definitely off the rose at google; the effects of the economic downturn are apparent to one and all from outside the company; not so apparent is the internal strife and rampant dissatisfaction within the company, which has lead to a mass exodus of some of its most significant contributors. the company simply grew too fast, too quickly, and its ineffective attempts to maintain a cohesive culture while assimilating all those thousands of new employees resembles a dog endlessly chasing its tail.

[MyTake]

When the public finds out the amount of data that Google is feeding the NSA databases, their dear old stock price will look like GM's.

[70sFez]

http://www.pslweb.org/site/PageServer?pagename=homepage

[djreedps]

Google earns $1.25 billion in the quarter: bad.
Citibank loses $2.5 billion in the quarter: good.

Wall Street is so messed up. Why is it that a company like Citibank who completely f's up looks good to investors because investors expected them to do worse than they actually did? Yet Google, which is still earning a good amount of money, doesn't meet expectations, so investors look unfavorably on it.

I recall a couple of years ago when Apple actually beat expectations for the quarter yet their stock went down. The reason was that investors didn't think Apple could maintain its position. What nonsense.

I think these Wall Street gurus are the same ones who get paid very well but could neither predict the dot com nor the sub-prime housing market bubbles bursting. It's "The New Economy". Right.

[atpal]

Except Citibank's still not trading close to Google's stock price. You buy a stock when it's undervalued, and you sell a stock when it's overvalued.

[KillTheMessenger]

Which makes you question investor's sanity when they produce PE ratios like Google's. It's still not Google's fault but simply a matter of investor's limitless greed collapsing on itself.

[gala1]

There is such a simple way for Google to rebound.

Just do what all the eBay sellers have been BEGGING Google to do for years now and create a site to compete with eBay and/or craigslist.
Which is essentially what eBay was in its beloved origins before Meg Whitman's blinkered avarice sucked the soul out of it.

What eBay can't turn around and what we all miss could be the blueprint for Google.
They even have the advisors available in those of us who have been selling since it all began to show them the pitfalls.

We are all so limit-reached disillusioned with the way the management has run eBay.
It is run on the Lewis Carroll School of Business Management Plan .
Where the sellers exist only to be nickeled, dimed and dissed by the management.
If youare not a stockholder, then they could care less how many different ways they do damage to you..

Google has the only three things you need to trump eBay.
Superior search engines, better name /market recognition , and a far more positive public attitude towards the company.

If Google did this they would instantaneously have a base of millions of fed up eBay sellers just longing for a better way to do business.
And money would just pour in.
For everyone.

-gala1

[aaronburr]

I agree that a high quality true auction site to knock off the crap and crime filled mud pit that eBay has become is desperately needed. Unfortunately, Google is not the one to do it. They have become so big, arrogant and bloated that they can't do much besides buy up other small innovative companies. That plus pushing their advertisers for higher and higher click fees are the only reason their revenue is growing at all.

In one area where Google tried to compete directly with eBay (Google Checkout vs. PayPal) the Google solution is totally inferior. I have heard repeatedly from online store operators who have tried both that PayPal - no great shakes as far as customer service to be sure - totally outperforms Google Checkout. Plus, security and interface issues make many merchants leery of even trying to use it. Hasn't made a dent in PayPal in spite of millions of dollars spent on promotions and incentives to online merchants.

Just like Microsoft in its day, Google was a great idea in the right place at the right time with good execution. Now, however, with senior management stomping their giant carbon footprint around the world in their party plane (http://www.wallstreetfighter.com/2008/06/google-party-plane.html) the bloom is definitely off the rose. Plus, their business practices are becoming increasingly ethically challenged and ripe for some of the same kind of regulatory grief that stalked Microsoft decades. Look for more disappointing quarters ahead.

[aaronburr]

I agree that a high quality true auction site to knock off the mud pit that eBay has become is desperately needed. Unfortunately, Google is not the one to do it. They have become so big, arrogant and bloated that they can't do much besides buy up other small innovative companies. That plus pushing their advertisers for higher and higher click fees are the only reason their revenue is growing at all.

In one area where Google tried to compete directly with eBay (Google Checkout vs. PayPal) the Google solution is totally inferior. I have heard repeatedly from online store operators who have tried both that PayPal - no great shakes as far as customer service to be sure - totally outperforms Google Checkout. Plus, security and interface issues make many merchants leery of even trying to use it. Hasn't made a dent in PayPal in spite of millions of dollars spent on promotions and incentives to online merchants.

Just like Microsoft in its day, Google was a great idea in the right place at the right time with good execution. Now, however, with senior management stomping their giant carbon footprint around the world in their party plane (http://www.wallstreetfighter.com/2008/06/google-party-plane.html) the bloom is definitely off the rose. Plus, their business practices are becoming increasingly ethically challenged and ripe for some of the same kind of regulatory grief that stalked Microsoft decades. Look for more disappointing quarters ahead.

[rh654]

You mean to say a company can't have explosive growth forever?

Now that's a revelation..............

[sink]

Only in this screwy stock market would 39% increase in revenues in the last quarter cause a company's stock to drop.

Ugh.

[EricSaeger]

Ah yes, Google. The last survivor of the dot com bust. What's the real issue forcing their stock into normal territory -- the disgusting interface or the fact that it's the most overrated stock in history?

[focher]

Actually, earnings per share are not unreasonable for Google's stock valuation. You seem to be blinded by the fact that they are an Internet company and the individual share price is high. That doesn't make the stock value overrated.

[Godfearing]

In a time of the Iraq-Afghanistan wars, consumer economic uncertainty, and the
U. S. National Debt reaching $10 trillion, MICHAEL W. HODGES' detailed "ECONOMIC
REPORT" is a must read by all free thinking Americans looking for financial trends
facing the United States. The complete report is contained in the following:

http://mwhodges.home.att.net/

[UnknownSoldier]

Very good link, with some really good info, the layout sucks, but good stuff.

[ChiGuy]

For "the most overrated stock in history", a term I've been hearing since shortly after its IPO, it sure has been a consistent performer for me.

Sell now, Eric. More for me to buy.

[Deaninphilly]

People are clicking less my foot. My bill doubled this month with google. Oh, they must have meant real people clicking the ads, not the fraud ads that I have to pay for from google. My mistake.

[myshadow]

There is some interesting filtration software here.

[Pam4Waters]

Yeah, I keep pointing out that a certain web page, wink nod, has almost as many photos of female cleavage as a news paper run by a certain man form Austria. And they all disappear mysteriously. Wink nod.

[darthdarcy]

Believe it or not this is also connected tot he Commodities and Futures Modernization Act that is also linked to the Gas Price and the Sub Prime Mortgage crisis...

We must reestablish Regulation to the futures market...or we will go down the tubes..!

[UnknownSoldier]

The Futures markets are fine, the regulation needs to happen with the Accounting Firms, Arthur Anderson did more damage to confidence than Enron. The Ratings agencies are the new Arthur Anderson. Right now I woudn't put anything into our Stock Markets you can't believe what CEO's are saying, so how can an analysis base his findings on spotting accounting provided to him by the CEO's. Until they start forcing these companies to show where the money is, don't give them any money.

[darthdarcy]

I'll agree with this much we must have Regulation or the system will continue to Cannibalize our Economy...!

[toadicux]

Is there a reason I can't post anymore?