Google: Reading The Q1 Tea Leaves

All right, bearing in mind that even Google executives seem to have very different views about where the business is going, let's think through what the events of the last few days might mean.

On Tuesday, in answer to a question about whether growth might have been turbocharged last year by anything of a one-time nature, CFO George Reyes told a compelling story about why growth accelerated then and why it is slowing now.  The stock instantly got crushed.  Eight hours later, Google put out a press release that ignored Reyes' story, and, therefore, essentially denied it.  The stock recovered a bit.  Two days later, a parade of Google executives, including Reyes, gave glowing presentations about how the future contained nothing but upside, upside, upside (and no mention of the "law of large numbers," either).  The stock recovered a lot.

So...What happened in the eight hours between when George tanked the stock and Google issued its tacit-denial press release?  Most likely, Eric, Larry, Sergey, George, Google's General Counsel, Google's external law firms, and Google PR team held a series of meetings/phone calls to deal with the crisis.  In these meetings, they probably reviewed exactly what George said, and compared this to the actual, real-time performance of the business.  Then they crafted a press release that everyone could live with, one that ignored George's comments--and, therefore, essentially denied them.  And then they probably decided en masse that it would not be misleading to fill the Analyst Day with nothing but optimism.

Among those who could live with the press release and Analyst Day plans, of course, were likely legions of lawyers, who would know full well that the company would only be increasing its legal liability if it 1) made comments that crushed the stock, 2) essentially denied those comments, twice, in two different forums, causing the stock to recover (luring back investors), and, then, 3) reported a weak Q1 a month later that crushed the stock again.  Presumably, therefore, the lawyers that approved the press release and Analyst Day ebullience don't feel there is much risk that Google will report a weak Q1.  And the only way they would be comfortable with this is if the senior Google team is very comfortable that the company will, in fact, report a strong Q1.  Otherwise, everyone would just have thanked George for his inadvertent damping of expectations and gone about their business.

So the tea leaves, it seems, offer an encouraging prognosis for Q1.

Comments

[Kevin Harper]

Henry, I'd love to read the exact quot on the "$100 billion company" being market cap or revenue and your take on it.

How do you parse that comment? It's a little baffling to me, especially since the first mention I read of that quote said "this year." To my knowledge, there's no possible way Google can earn $100 billion in revenue this year. Which leads me to believe he was talking market cap, which means his target share price is below where it's currently at.

I'm thoroughly confused by this, yet no one seems to be talking about and trying to figure it out.

[SomeDumbGuy]

So...another way to read Henry's analysis - perhaps these guys are not as smart as they would like us o believe - and they really are pulling an Enron on everyone?

[Henry Blodget]

Kevin--Good question. I'll address in a post.

[Robert]

Kevin and Henry, there should not be any confusion.
Eric Schmidt stated at least twice that Google would be either attain
100 billion dollars in market capitalization or 100 billion
dollars in revenue. At this time Google has a market cap
of 115 billion dollars which leaves only one choice.
Rightly or wrongly, poosible or impossible, Google has a
long term goal of 100 billion dollars in revenue.

Now some naysayers writing on this site believe strongly that
Google will do a round trip as Enron did, but Schmitt
and the other Google employees who spoke yesterday and
most analysts certainly did not indicate that Google's
Armageddon was imminent.

[Still Inside]

Good analysis, Henry. I think you are right, and I think its possible that GOOG may get on track next quarter. As such, betting on Q1 for GOOG will be a double-or-nothing kind of deal. If they hit it, then they'll resume the fever. If they miss (after all of that hyping this week), look for the stock to go into perp-walk territory.

SI

[Vic]

Henry,

I think you are giving Google management way too much credit. As they mention, they try to run the company, not the stock. With misstep after misstep in regards to their running their stock, we know this to be the case. Case in point, they could have bought AOL just off the increase in market cap off a stock split. So, why should we now believe that they had this huge meeting with all parties you mention to discuss something that affected something they purportedly don't care about? Granted, they do know how the quarter is turning out. Xooglers already confirmed there is a mothership app with limited access which enables some privileged Googlers to see what's going on. But I don't think for a minute they took this into account when creating their crisis management plan to deal with George's loose lips. JMHO.

[Henry Blodget]

I think even managers of "a different kind of company" probably understand by now what kind of legal liability is created when executives say something that can later be said to be at odds with something else they said or knew (and if the Googlers don't, their lawyers almost certainly do). George Reyes singlehandedly knocked $10-plus billion off the market cap in 20 minutes with a detailed explanation for the company's acceleration last year and slowing growth now. I have to believe that Larry, Sergey, and Eric have read enough recent headlines to understand what would happen if plaintiffs lawyers could later show that George's explanation was right on the money and that the company's subsequent press release and Analyst Day presentations ignored this material fact.

My prediction: If Google misses Q1 estimates, the "no guidance policy" will not protect it from a storm of lawsuits alleging that George Reyes was trying to warn investors and that the triumvirate, desperate to protect their fortunes, overruled him. As has been shown often in recent years, such allegations don't have to be true to win vast settlements--they just have to avoid seeming patently absurd.

[Neal Lachman]

Henry,

You have an excellent point here. Reyes was truly telling the truth, and the billionaires came in and tried to "damage control", something they may have done for primarily their own benefit, and not the company (thus their shareholders). Accountability and responsibility, what't that?

[Still Inside]

George Reyes was walking through a tinderbox and he lit a match.

The fact that it blew up in his face (and in the face of anybody holding GOOG shares) can be partially blamed on Reyes, but a more complete explanation would be the conditions that caused the explosion.

With no guidance and extremely iffy suppositions that attempt to justify a 100:1 P/E, investers are on a hair trigger with GOOG.

This thread's debate is over the present mental state of the GOOG founders. For evidence on that, look for the fact that the one thing we still haven't seen is even a single shred of humility from any of them. Successful and confident people don't act like that, in my experience.

SI