The Super Bowl of Earnings

For analytical types, the last two weeks in January are like this Sunday for football fans. It’s during these times that the public companies, including those in our space, announce their fourth quarter earnings. All the guessing ends and reality begins, which was certainly the case for eBay and Yahoo who kicked off the earnings period two weeks ago. So, how did they do? Pretty good, sort of. EBay reported a 36 percent jump in its profit, hitting $279 million for the last quarter of 2005 with revenue increasing 42% to $1.33 billion. The Street responded by driving the stock down 5% in after hours trading because eBay didn’t choose to revise upwards their 2006 estimates, which they gave in October 2005. Not that they did poorly in 2005, earning $4.6 billion in revenue up from $3.2 billion in 2004.

Yahoo faired worse, at least with respect to their stock price, which dropped 13% after announcing their fourth quarter numbers. Like eBay, they too beat their prior year’s numbers, but the buyers and sellers of stock expected more. Yahoo saw net income hit $683 million, up more than 80% compared to the same time last year. A big portion of the jump though came from a one-time gain related to its $1 billion investment into Alibaba.com. Revenue hit $1.50 billion, up 39%, topping the 37% increase in traffic costs. Yahoo’s shares fell, not because of 2006 guidance but because analysts felt the company wasn’t taking advantage of the hot online advertising market. Translation: the company wasn’t doing as well as the same analysts thought Google was doing.

Two years ago, there was no way of knowing how Google was doing. The company was private and the definition of tight lipped. The company isn’t any less-tight lipped, but they are now public which means they too must share their results and will be judged. For the benefit of any Rip Van Winkle out there, here is a quick recap of the past five quarters – phenomenal. Two days after the “disappointing” earnings from Yahoo and eBay, Google stock touched $475, almost six times above its $85 IPO price. Its stock was trading at 95 times its trailing price to earnings ratio. For the non-investment folks, here are some numbers to put that into perspective. EBay is at 55, Apple at 40, Yahoo 27, and Microsoft 23. That upper 90’s figure is more Bubble 1.0 than Web 2.0. But, it was that high for a reason. Those tracking the company had high expectations for the company. Its stock price reflected not just its past success but the expected future growth. That super high P/E was the investing equivalent of buying a kid, whom you think will hit a growth spurt, shoes that are a few sizes too big. Taking that into account, the company’s “shoe size” was in between Apple and eBay’s.

I say the price “was” trading at that multiple because, as has already been blasted across countless publications, Google’s shares have gone down. And, while it may not seem like it, they have gone down before, as recently as ten days ago when the company said it wasn’t going to comply with a US Government request to hand over search information. Fighting the US government didn’t work well for Microsoft, so when Google followed the path of defiance, the public markets used it as an excuse to take out some money. All of which brings us back to their Q4 results. Judging from the at one-time almost 20% drop in its stock price during after hours trading, you might think the company lost money. But, no, Google reported revenues that matched most analysts’ expectations. They earned $1.92 billion in the final quarter of last year, up 86%. Net income jumped as well, to $372 million, up from $204 million a year earlier and up more than 20% from Q3. Income was high, but not as high as was expected.

Many reasons exist behind the rapid change in Google’s stock, which closed yesterday at $401, down 7% from its close on January 31st, but up from the 13% slap during the close of after hours trading. Primary among the reasons, the company missed the target earnings per share that most analysts had pegged. Among the potential reasons, their international revenues grew compared to the same time last year but dipped slightly when compared to the previous quarter. Another is due to what some consider poor tax planning; Google saw an effective tax rate of 41% compared to the normal 30% or so. And, as internet.com news pointed out, the economy grew minimally in the fourth quarter, and it’s perfectly reasonable for Google to have been hurt by such a macro trend. But, more than analytical reasons behind the correction, expectations killed Google. The company spoiled all of us by beating estimates, again and again. No amount of reason could keep hope in check. So, the company that offers less guidance than almost any other of one so prominent, felt the backlash.

The big question for Google is how much room do they still have to grow. The company looks to its international operations for short term growth and to its ability to be the one-stop shop across all media formats for its longer term growth. Even with bid prices being almost too high in the States and keywords already achieving commodity status for many verticals, my own recent dabble illustrates why the company isn’t done. In my experiment, I bought traffic on some less competitive keywords. The quality factor insured that I still paid a hefty per click amount, and not tracking by keyword or using any bid management software, I insured a slim chance of breaking even. But, I, at least, knew what break even was. There are still tens of thousands of businesses who are now just starting to feel that they need to be on Google. They too will spend money, enamored by how easily they can get started and how quickly they can see results. They’ll spend consistently, not really knowing whether it’s a good investment or not.

In some respects no other company has done what Google has. They have effectively created a mini-stock market around every word and phrase in every major language in the world. They are number one, still growing, and the new company we love to hate. Despite the recent blip, the average analyst still believes the stock should hit $500 this year; while only one seems to think it will end lower than its current $400 price. And, that analyst is probably just doing it to be a contrarian. That Google’s stock went down and followed the trend set by other Internet and tech stocks is just fine. We’re not seeing a mass sell-off or the types of one-day drops we saw during the first bubble. If anything, this was a test. We knew it would happen; now, we just have to stop being babies and upset because it did. Back to business; we’ll do this again in three months.