Hitting the barn door

How could Google/GOOG miss its earnings forecasts by such a wide margin...? And what about the stock...? First (via Seeking Alpha),

"Google shares were down 8% in pre-opening trading, after the company said second-quarter earnings fell just short of analyst estimates, while profit margins missed expectations by over four basis points. Net income jumped over 28% to $925.1 million ($2.93/share), up from $721.1 million ($2.33) a year ago, while revenue surged 63% to $2.72 billion. Excluding stock options costs EPS were $3.56, shy of analyst consensus estimates of $3.59/share, while revenues were slightly ahead of analyst calls of $2.68 billion. In a note to clients, Citigroup analyst Mark Mahaney said Google's negative margin trends were the key issue. Pro-forma operating income was about $1.35 billion (50% margin) vs. estimates of $1.45B (54.4%). Year-over-year, its margins have dropped five basis points. In 10 of its 11 previous quarters as a publicly-traded company, Google has beaten estimates."

The truth is that Google missed expectations by a 'whopping' 3¢/share -- more if you factor in the whisper numbers; in either case, not a wide margin (3¢ on $3.50!) for a company whose earnings and revenue numbers (and growth) are this massive. Too, Google delivered 2Q07 revenue growth above expectations; however, this was offset by much higher spending on employment gains and change in bonus accrual, which could have cost $0.10-0.15 in earnings/share.

But what of the stock? This seemingly substantial price decline in reaction to the earnings news is how it goes for growth stocks, the great ones included; this type of occurrence can be expected. (And was.) After trading down by more than $45 (to ~$502), the shares quietly rebound to a last trade of ~$515, as investors recognize this decline to be a buying opportunity for those with a long term horizon. I know that I, too, will purchase more shares at a safe harbor price. I will do so because at $500/share (rounded down) and including yesterday's reported earnings, the stock sells at 26x earnings; an incredibly cheap price and value that will not linger for long. Although I am loathe to place a time frame on it, my guess would be that by the time of the Q3 report, certainly the Q4 report, Google/GOOG will again be stretching its grasp into new high territory.

Full Disclosure: Long the shares of Google/GOOG, and about to get more long.
-- David M Gordon / The Deipnosophist