Google Inc. demonstrated on Thursday just how painful missing expectations can be. The company, best known for its search engine, released its third-quarter results earlier than expected, apparently in mistake. But while investors are willing to look beyond such errors, they seemed terribly unforgiving about the results themselves.
Make no mistake: Google remains wildly profitable. But given the 38 per cent gain in the share price since early June – to a record high of $768 (U.S.) on Oct. 4 – that's not good enough. The shares fell as much as 11 per cent after the results were released. By 1 pm (ET), they were down $65 or 8.5 per cent.
What's so ugly here? The company reported earnings of $9.03 a share, after excluding some one-time items; analysts had been expecting $10.65 a share, according to Bloomberg News. Revenues were $11.3-billion; analysts had been expecting $11.8-billion.
So Google definitely disappointed expectations. But there might also be concerns about the company's longer-term growth here. Growth has been slowing recently. In terms of annual earnings per share, it slowed to 21 per cent in 2011, down from 27 per cent in 2009 and 2010. With the third quarter, though, earnings actually retreated about 7 per cent from the third quarter of 2011, raising alarms.
Still, the selloff on Thursday afternoon might be overdone. While the share price recently touched a record high, valuations haven't. The shares trade at 21-times trailing earnings, below the five-year average of 26-times earnings. And the shares trade at just 16.3-times estimated earnings, which is very reasonable for a technology company.