Google Missed: I told you so :)
First, I was pleasantly surprised to see that CNN Money quoted and linked to my blog (just a few hours before my prediction came true, I made this prediction about more than 2 weeks ago):
“Rival trashes Google’s growth prospects”
However, I was very upset by the wording they used in that title. My blog represents my personal views and do not reflect those of Yahoo what so ever, also I did not trash Google. Its misquotes like this that cause bloggers major problems and could potentially lead us to stop writing, so please be careful next time.
Now its time to gloat 
Google earnings are out, their sequential gross revenue growth was 22%, which did not just miss the 30% that the bulls were predicting, but also barely met the lowest of the sequential growth estimates (which was around 23%).
To top it off, Google also increased and plans to increase its spending significantly. They hired 700 more folks in Q4, they doubled their sales and marketing spend (over 2004-Q4), and they said their expenses are likely to rise significantly as they invest in long term projects. So its really a double whammy from top and below.
That said, 22% sequential growth for a $1919M Q4 is still very impressive, but it missed the expectations and it certainly does not justify the $500 to $600 stock price targets that some analysts are setting. To put things in perspective, Microsoft with a marketcap of $300B did $11B in sales last quarter, that is almost double what Google made for the whole year, so how can Google get a marketcap of $150B (at $500 price target). I think Greenspan had a word for this, let me try to remember, ah, he called it “irrational exuberance”.
– amr
Great job on the prediction. I found your blog from the cnn money article. What you wrote was very interesting. I hope you keep the insights coming. Your blog is now book marked
Comment by Ryan Hutchinson — January 31, 2006 @ 8:39 pmIt’s not the sales but the cash-flows that’s important for the valuation. Rather than looking at $11B vs. $1.919 B, we maybe better off looking at the net cash-flow metric, and growth prospects growing forward.
Comment by AK — January 31, 2006 @ 8:54 pmGreat call! I only wish I had known about this sooner so I could have placed some put options on it.
Comment by Nymphe — January 31, 2006 @ 9:45 pmVery nice call amr.
From CBS’s MarketWatch:
“GOOG (432.66, +5.84, +1.4%) had a 41.8% effective tax rate, more than its forecast for an annual tax rate of 30%. Chief Financial Officer George Reyes said on a conference call that “most of the (earnings) miss was tax related.”
It’s not as simple as tax issues that both the CEO and CFO blamed the shortfall on. In any case, taxes should be taken into consideration in valuations, and if the CFO did a poor job forecasting tax liabilities, they should have blamed that on their own imcompetence, and also for doing a disservice to their shareholders. A few percents tolerance is reasonable, but 40% miscalculation in tax liabilities?
The street was not too stupid as to buying into that simplistic tax excuse as evident by the dumping of the stock in AH trading. The main reason is deceleration of growth as you correctly pointed out.
Of course, sky high expectations just added fuel to a stock priced for perfection, especically when “Wall Street concensus” was extremely bullish on the stock. We all know what usually happens to a stock when most ANALysts are bullish, especially that knucklehead with a $2,000 price tag.
Comment by a — January 31, 2006 @ 10:00 pmGood analysis has proven right, Amr. “Irrational exuberance”, very appropriate phrase!
Comment by Sundar — January 31, 2006 @ 11:10 pmHung over may be the mood of the day at Googleplex tomorrow. Some of 700 new hires may reveal their B nature soon
Congrats on the prediction Amr.
Comment by Vincent — January 31, 2006 @ 11:40 pmAmr,
Comment by Nathan Bosley — February 1, 2006 @ 2:56 amFor what is worth - you were right on. I have been reading your Blogs and will
continue to do so. Please keep analysts in check. I am looking forward to your
take on Google and how they are tracking for the Q1 of 2006.
Once again - Way to go !
Good call !!
Your blog is one of the few rational comments on google’s valuation.
Be careful, if you get it right again, Wall Street might hire you
Comment by SVGeek — February 1, 2006 @ 6:58 amAmr: Congrats on the CNN nod!
I’ve been following your blog since the October 21 post about google, and I find your insight invaluable.
In particular, I notice your comments about 3 ad posts above the serach results, etc. I notice that only happens sometimes. For example, if you search on “toyota camry” you only get two. Sometimes you only get one “pc for less”. (FYI: “toyota camry” on yahoo produces three ads at the top, not that I care)
But my real question is this:
Do people really click on these ads? Everyone I talk to who has been using the web for at least 5 years just skips right over the ads in that blue box, and they also skip over adsense ads on blogs and other sites too. One said “I see the little box with the tiny font, and my eyes just jump over it”.
It seems to me that results page ads rely to some degree on the user not realizing that the items at the top are ads. (I know they are labeled as sponsor results, but you know what I mean). And the way people embed adsense in-line into blogs reinforces this. Relying on user ignorance and confusion for revenue, even to a small degree, is a bad sign.
Will adsense be less successful in the future people become more savvy about what are ads and skip over them, just as they have done with banner ads?
Comment by Me — February 1, 2006 @ 7:10 amWhat? The media misconstrued what you wrote in order to make the story more juicy? Things have gone to hell in a hand basket! (Great call Amr, way to use that gigantic brain of yours!)
Comment by Beach — February 1, 2006 @ 8:22 amAmr - Great PRE HOC analysis dude!
NOW I’m hoping you’ll share your thoughts about the *revised* price of Google, which still seems pretty darn high.
Comment by Joe Hunkins — February 1, 2006 @ 8:40 amAmr,
Congrats on your 15 minutes of fame!
>so how can Google get a marketcap of $150B (at $500 price target).
It’s all about the growth / growth rate and the multiple Wall Street and investors want to give Google. What was Microsoft’s revenue growth rate when they announced earnings - I think it was 5%.
John
Comment by John — February 1, 2006 @ 9:55 amYour comparison of MSFT to Google leaves out the fact that stock price do not reflect just current success, but the future success which investors expect.
Comment by Brad — February 1, 2006 @ 11:02 amYou were right on the revenue falling short, but GOOG seems to blame the earnings miss on a higher tax rate, rather than the search monetization factors you cited. Supposedly if the tax rate had been what they expected, they would have beat their profit forecast. Looking back now, do you think your view that they could not get enough of a boost in RPS is the reason why they missed?
Comment by Jamie — February 1, 2006 @ 11:15 amWell, to be fair in the MS vs Google price comparison — does MS have anything like 22% sequential quarterly growth? And if not, then how many quarters is Google behind MS at current growth rates? And is marketcap a better indicator of current operating results, or future results?
Comment by Craig Hughes — February 1, 2006 @ 12:21 pm… just wanted to add that I’m not saying I don’t think Google (and MS too for that matter) is overpriced. But when comparing the two, you need to take a wider look.
Comment by Craig Hughes — February 1, 2006 @ 12:22 pmGood call on GOOG — but as my understanding is — didn’t a majority of the miss really come from weak international, specifically weak UK revenue because of a seasonal dropoff in December, which mgmt described as a reverse holiday impact?
Now assuming mgmt is not lying, because we must give some credit and then note the US revs were relatively in-line (not strong and not particularly weak) then this means that although there wasn’t huge upside from better monetization and other issues, the real miss came from weaker UK revs — specifically, weaker search volumes.
Thoughts?
Comment by MY — February 1, 2006 @ 12:35 pmThe only way to rationalize $600 is if you think G is going to find another huge revenue stream besides search, which seems like a longshot.
Comment by gerster — February 1, 2006 @ 2:41 pmIn regards to the tax situation, plug in compare Q42004 tax rate not yearly tax
rate and you come up with a worse number
One more point:Why is no one bringing up that many of the analysts firms do
Comment by Fred D — February 1, 2006 @ 5:44 pmwork for GOOG? including the recent follow-up offering?
One analyst even upgraded the stock today. He had a higher estimate, they missed and now his target is higher than a day ago?
Someone, like Spitzer should investigate this.
Can we talk about the discrepency between GOOG’s pro-forma shenangians and their GAAP performance? Pro-forma
Comment by GOOG Skeptic — February 1, 2006 @ 11:27 pmearnings are supposed to reflect one-off events that don’t have anything to do with the on-going performance of
the company. However, in each quarter, GOOG keeps adding back an increasingly large stock based compensation expense,
an expense which is certainly not a one time occurrence. After all, SBC is THE way that GOOG recruits and retains
their employees (anyone who knows anyone at that company can tell you that). When you look beyond these “everything but the bad stuff” earnings and view the actual GAAP earnings, it is apparent that quarter to quarter growth has not improved at all over the past four quarters. Thoughts?
Amr, thanks for the keen insights. Delighted to link to them, and I’m sorry you took issue with the headline. Just a couple points — the headline is not a quote, so how can it be a misquote? And second, the headline doesn’t say you trashed Google — it says that you trashed Google’s growth prospects. I think that’s a fair, concise description of your post. Glad to agree to disagree on the latter, but let’s make sure we’re discussing the actual meaning of the actual words.
Comment by Owen Thomas — February 2, 2006 @ 7:47 amOwens,
Thanks for commenting, the problem is that my ears got pulled at yahoo because of this, that is the message I was trying to communicate to you (I guess its the “Rival” word).
– amr
Comment by amr — February 2, 2006 @ 2:11 pmHey Amr,
I am glad Owen came and clarfied with you. As someone who has worked with the news industry, I could feel the spicy effect the headline could have caused.
Recently there was a comment from Yahoo’s CFO which I felt was quite unnecessary. I was going to ask your comments on Yahoo!’s stand and how important you think search is to Yahoo!.
My other questions was if your “ears got pulled”, what happened to the CFO? But I guess I found my answer here:
http://www.webpronews.com/insiderreports/searchinsider/wpn-49-20060125YahooSearchExecsBlastCFOComments.html
Frank
Comment by Frank Mash — February 2, 2006 @ 11:37 pmP.S. Thanks for “shorting” 10 GOOGs.
I made my comment on my site.
http://www.ogletreeseo.com/66.html
Comment by David Ogletree — February 6, 2006 @ 11:04 am