Enough Whining For "Guidance"

To read some of the press coverage and analyst quotes, you would think that Google's recent stock plunge is due entirely to the company's refusal to give "guidance" (Translation: to tell analysts what to "estimate").  In fact, the plunge has nothing to do with the lack of guidance.  It is the result of 1) slowing growth, and 2) investor expectations finally having exceeded reality (something that happens routinely, with or without guidance).

If Google were to give "guidance"--and nothing says it has to--the guidance would likely be intentionally low-balled, just like most companies' is.  If it wasn't, Google would likely "miss its numbers" as often as it hit them, and thus be accused of being unable to forecast its results (and, in the process, screwing its investors).  Analysts, therefore, would assume that the company's guidance was low-balled, and adjust their estimates accordingly (or they would just tell everyone to expect "upside"--which everyone duly would).  So if the company merely hit its numbers, as it did in Q4, the stock would tank. 

Google's recent communication gaffes are serious and need to be addressed immediately.  If the company is committed to the no-guidance policy, then this should include "no commentary about financial performance between quarterly conference calls."  The communication problems, however, are separate from the guidance issue.

I respect Google for not giving guidance, a practice that often reduces analysts to parrots with spreadsheets.  Without guidance, analysts have to actually develop estimates, and the estimates have to be based on more analysis than "1%-3% above the company's guidance".  If the stock is more volatile because analysts' estimates are more widespread, then so be it.  Investing in stocks is risky, with or without guidance--as companies who radically miss their numbers frequently illustrate.

The whining about guidance, in my opinion, is actually just frustration that the Google goose is no longer laying golden eggs.

Comments

[andrew]

It's amazing how a company that claims to operate with the BUFFET model/MO but continues to fumble the ball in the end-zone. Such mishaps are not acceptable PERIOD!

[Johnathan Donut Jr.]

whats up with the india job site ads?
lots of indian viewers?
(is somewhat relevant to goog i guess)

[Fabio]

"a practice that often reduces analysts to Excel-savvy parrots"

I would say it elevates them to Excel-savvy parrots.

[Henry Blodget]

Touche!

[Shivering Timbers]

Henry:

Bravo for using your soapbox to make this point. When I was a sell-side analyst (roughly the same years you were), it always bugged me that I rarely got to do any, you know, analysis. And the companies spent too much time doing the earnings kabuki dance, rather than focusing on the business--sometimes with disasterous results (witness Enron and Worldcom).

There simply was no opportunity for a sell-side analyst to add value, except to be maybe a penny above or below the consensus.

[Kevin Harper]

Bravo to Shivering Timbers' comment above.

What I find bothersome is that the company wanting everyone to make their personal and proprietary information available to them for the sake of corporate profits doesn't want to give up "personal and proprietary information" to investors in the form of financial visibility.

I am definitely not wanting them to reverse their "no guidance to analysts" policy. But they claim to want to democratize the Internet, so how about making an end-run around the Street and taking a clear, confident message directly to the people?

That is, if they have a "clear, confident message" in the first place.

[Internet Bear]

Google trying to align itself with Buffet's style and principles is an example of corporate hypocrisy at its finest. For example, when Google went IPO, public shareholders had 1/10th the voting rights of insiders. This was an insult of shareholder intelligence, and the height of arrogance and hubris in my opinion.

Internet stocks are a zero-sum game (insiders make money at the expense of a vast majority of the investing public). I don't dispute the fact that the internet has changed life significantly (as did the Automobile, the Aircraft and Railroads). If we are to take our lessons from those other industries, the average investor fared very poorly investing in those industries.

To paraphrase a couple of Buffettisms - Internet Stocks are all about monetizing the ignorance of the multitude and Internet Entrpreneurs have proven great at making money off shareholders, not for them.

The US has been awash in liquidity from 2001-2005. A lot of that excess liquidity has flown to the internet sector. It will be interesting to see how that sector fares as money tightens (and losing sectors such as risky mortgage loans/HELOCs unwind).

[Neal Lachman]

Henry,

Do you mean to say GOOG is bound to spiral down in sharevalue now onward, regardless what kind of new service they may cough up? I feel GOOG is over its heydays.

[bronxite]

The complaints are pretty pathetic. I heard one analyst claim that they had a fiduciary duty to provide estimates, as most insider and VC money was now out of the stock.

[Neal Lachman]

Bronxite,

I guess there is truly some fiduciary duty to do so. The SEC has some clear indications what a public company should do. read this http://www.sec.gov/news/press/2003-179.htm

and then read the second half portion of this http://www.sec.gov/news/speech/spch041003cag.htm

Google thinks it is above all other public companies, and i think they can burn their butts in the very near future with class action law suits coming up. Henry has also mentioned that possibility earlier somewhere. I feel it is a certainty.

[k]

Will this be the last? Click fraud now acknowledged:

http://news.moneycentral.msn.com/ticker/article.asp?Feed=OBR&Date=20060308&ID=5566916&Symbol=US:GOOG

[k]

Oops, try this:
http://googleblog.blogspot.com/

Lane’s Gifts v. Google

[anon]

Click fraud?

I don't see any google ads on my Firefox browser. Why? Because I have this "Adblock Plus" extension installed.

You folks should try it, and you will know why ads are moving to game and movie scenes.

[The guidance game has clear risks. It can foster short-term thinking by companies desperate to make]

Analyst should stick to their job and do the math and make earning estimates of stocks. And companies should not make earning guidance. The guidance game has clear risks. It can foster short-term thinking by companies desperate to make the quarter. Guidance can also encourage investors to focus too heavily on earnings numbers (affected by non-operating items such as tax rates and asset disposals) rather than key measures like cash flow. Even the supposed benefits of lower share price volatility or higher valuations for the companies offering guidance are illusory, according to analysis by McKinsey. Companies would be better off laying out longer-term goals for revenue growth, and giving a view on margins and costs, which can be difficult for outsiders to predict.
http://www.ft.com/cms/s/94704760-af90-11da-b417-0000779e2340.html

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