The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

01 February 2006


A reader writes, plainly and pithily...

"Umm, this does not sound good (for Google). Buy more, sell, or hold?"
Regular readers of this blog will recognize that yesterday's post-earnings report and after-hours selloff fails to represent a surprise. On Monday, 23 January, I stated, "Yes, this appears to be the first meaningful correction Google/GOOG has had to endure in its 17 months as a publicly-traded company. Part of this reality is due to heightened expectations, another part to Yahoo/YHOO's earnings expectations shortfall, and a third part (accounting for the steepness of the decline) is the news that Google stands up to the DoJ..." and "the first decline in a bull market ... tends to be a Fibonacci 38% retracement; that count is the same approximate price level as the near future placement of the 200-day sma, or ~$330..." And in this comment, posted yesterday, I stated, "the stock chart betrays the likelihood of another large price move post-report".
Taken together, and you have the result now obvious to all -- GOOG down $49 from yesterday's closing price, yes, but up ~$30 from the lowest levels in after-hours trades. The shares stabilize, even as I write this post. This all means (for me, and I hope for you) that the market's reaction to the earnings report, startling as it might appear at first blush, is anything but; it was expected (by me) and fits within the bullish pattern the shares have enjoyed since the company's IPO, and that continues.

Certainly, the company continues apace. If you listened to the conference call you would have heard company executives subtly suggest that they position the company for a watermark year (in 2006) of company innovations and products. Many of the expenses related to those initiatives will be front-end loaded, meaning costs now without the associated benefits (revenues); of course, the flip side of this reality also is true, that benefits (added revenues) will increase without the extra costs (SGA) typically borne of this effort, because the costs will have been already expensed.

At the correct price and granted sufficient time, Google/GOOG again will manifest as a sterling investment. For the nonce, we must determine the ultimate depth of this decline -- to $330? Lower than $330? Perhaps, and most likely, the ultimate low will prove higher than that ($330); i.e., shallower than most investors now expect.

More anon, as available.

-- David M Gordon / The Deipnosophist

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