Sometimes you just can’t please Wall Street. On Friday, the day after it registered a pretty solid advertising rebound, Google’s stock plunged by nearly 8 per cent – its worst day in 16 months.
The market as a whole sold off more than a percentage point, but it was hard to find any clear reason for the Google slump. It almost seems like people have been fishing around for a good excuse to sell. Here’s how we handicap three possible explanations:
More heads – and servers. Google’s back on a spending binge again. It hired nearly 800 people last quarter. Capital spending still looks moderate but CFO Patrick Pichette seemed to do everything in his power to flag a big jump ahead. As it proved a couple of years ago, Wall Street gets nervous when Google talks like this. This looks like the main cause for the stock price hit. Expect very close scrutiny of the company’s EBITDA profit margin in the coming quarters (in Q1, down to 61.4 per cent, from 64 per cent three months before).
Falling prices. Coming out of a recession, noone wants to see signs that pricing could be under pressure. The opposite should be the case. But it seems to be stretching a point to read too much into the 4 per cent decline in Google’s cost per click compared with the preceding period. Currency fluctuations accounted for a big chunk of the fall. And as Google executives pointed out on the earnings call, there are so many different elements that go into making up this single number – and so many cross-currents from different markets – that it’s difficult to draw conclusions from a single quarter. Expect close scrutiny of CPC as well in future for any signs that this is a trend.
Where’s Eric? Journalists are trained to be suspicious. So naturally, when Google called the day before earnings to say, “Don’t read anything into the fact that Eric Schmidt will no longer be present on earnings calls”, I instantly tried to read something into it.
Some analysts have been doing the same thing. The reality, though, is that few CEOs of companies this size appear on quarterly earnings calls. In the absence of more evidence, this does not look like a good reason to sell Google stock.
This is bound to bound to nag at the suspicions for a while. But of the people I spoke to today about this, Youssef Squali, internet analyst at Jefferies & Co, put it best: “I’m pretty sure Eric Schmidt didn’t like Wall Street anyway. I’m surprised he’s stayed on the call this long.”
