Sunday, July 20, 2008

Google’s Shares Dropped 9.8 Percent on Last Friday

Google, the Internet search king's, paid a price for what an analyst called a failure to communicate. It was the stock's biggest single-day percentage decline ever. Google’s shares fell 9.8% on last Friday, a day after the company offered little specific insight into its second-quarter earnings miss, raising uncertainty about the health of the online ad market.

After the close of regular trading Thursday, Google reported a 30% jump in its per-share profit vs. the year-ago quarter, to $4.63. However, it was 11 cents below analyst expectations. Google's sales, minus commissions it pays to ad partner sites, rose 42% to $3.89 billion, meeting views.

Google is continuing expenses for its purchase of online ad services company DoubleClick and spending higher legal costs to defend against a lawsuit by Viacom (NYSE: VIA - News) over videos on its YouTube site. Moreover, Google has to spend the cost of establishing a foreign exchange hedge program. All of those activities have made Google’s executives attributed the lower-than-expected profit to lower yields on cash balances (down $109 million from the first quarter). However, Eric Schmidt, CEO of Google, in a company statement referred to "a more challenging economic environment."

Google executives did not offer much more on a conference call with analysts, though for the first time speakers included an executive with the title of chief economist, Hal Varian. Hal Varian said the weakest ad sectors were home financing, auto and real estate. However, only real estate showed a drop in search query growth.

Youssef Squali, an analyst for Jefferies & Co., who has a buy rating on the stock, said Friday's sell-off likely was precipitated by Google's failure to communicate the story of the quarter more clearly, while hinting that the economy could influence the online ad market. Moreover, he said Google's management wanted to stay as opaque as possible about their business, but the stock market’s bears believed that they were effectively setting the stage for the weakening economy to start having a negative effect on their growth rate in a big way, and that was why the stock was off.

Analysts and investors also had less to go on Friday because the company, as per its policy, did not provide any guidance. According to Martin Pyykkonen, analyst for Global Crown Capital, that was one of those lessons where if we have a company that does not give guidance, many people (analysts) miss certain things. He rates the stock overweight, or the equivalent of buy.

Google made 97% of its revenue from ads placed near search results. It is far ahead of No. 2 Yahoo (NasdaqGS: YHOO - News) and No. 3 Microsoft (NasdaqGS: MSFT - News) in that growing market. Moreover, Google's paid clicks rose 19% in the quarter vs. a year ago, but dropped 1% from the first quarter. Squali said that was the first ever-such decline for the company. However, some called the drop in price Friday a buy opportunity.

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