Google's Only Downfall (GOOG, MSFT)

After looking through Google (NASDAQ:GOOG) earnings commentary and after listening to much of the conference call replay, it became quite clear that the company biggest miss on earnings wasn’t the slightly shy EPS and wasn’t the slightly higher than expected revenues.  This company is spending and spending to maintain growth and to make whatever future challenges it will really meet down the road.  If you look through the earnings summary explanation we gave, the reasons for the slight miss on earnings per share are the same: technology spending and ‘too many’ new job hires.

Yep, the company has made two major acquisitions in the last 9 months, yet they are being punished for spending too much for staff, bandwidth, and equipment.  Don’t take this the wrong way, because we aren’t trying to get the pom-poms out when the bleachers are emptying out.  But the actual 7% after-hours seems excessive.  Forget the $500+ price tag on the stock and look at the growth and the multiples.  When you consider that the Googlites do not offer formal guidance to analysts, there is a ton of guesswork from Wall Street in determining these numbers.  Sure, Microsoft gained in search share last month, but that will have to last for the organic growth to be outpaced by cannibalization.

Anyhow, this is just an initial take.  You can rest assured that there will probably be several analyst calls from the ones that think this is the end of the road.  You may see some downgrades, and those will trump the slew of "Reiterate Buy" ratings that occur oon Friday and Monday.  You may even hear on the television that its best days have been seen.  That may be true as far as the percentage of growth to earnings and revenues, but it sure seems like there is still an opportunity for longer-term players.  Sergey, Larry, and Eric still have a long way to go, and much of the growth will probably end up still being organic rather than a zero sum game at everyone else’s expense.  The market and the technology climate isn’t really any different than it was 18 hours ago, and if Google is willing to spend like this they probably have som comfort that the search and internet business will keep yielding profits galore.  That’s this bloke’s take on it.   

Jon C. Ogg
July 20, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.