Time For the Quarterly Google Craps Game

Okay, Google gamblers.  This one's going to be interesting. 

On the one hand, Google's modest deceleration last quarter suggests that the company is going to once again deliver (relatively) ho-hum results and disappoint investors conditioned to expect the astounding.  It takes a long time for a supertanker to change speeds or course, and, last quarter, anyway, it did seem that the Google supertanker was finally beginning to slow down.  This diagnosis seemed confirmed by possible canary-in-the-coalmine announcements from advertisers who were cutting back on search spending because prices had gotten out of hand.  And then there was CFO George Reyes' lucid mid-quarter explanation of why growth had slowed in Q4--because previous growth had been accelerated by a monetization program that had now run its course.  This convincing explanation kneecapped the stock for the eight hours it took for the company to issue a press release that said, effectively, George was wrong.

But the company did issue that press release--and that action, itself, along with the sale of $2 billion-worth of stock at the end of the quarter, probably provides a window into performance.  In the current regulatory environment, companies have to be beyond stupid to set their shareholders up to get killed, and since it would be easy to demonstrate that, guidance or no, Google probably knew whether its numbers were going to disappoint or impress, issuing the press release and stock if they were going to disappoint would be nuts.

In any case, its time for readers to place their bets. When we performed this experiment last quarter, you may remember, the collective assessment of IO readers proved an accurate estimate of what the market was really expecting (as opposed to the First Call Street analyst consensus).  When the company merely delivered the analyst consensus, therefore, the stock tanked.  Perhaps this quarter investors have successfully reined in their expections so an in-line number would be neutral or positive.  Or, perhaps, once again, for the stock to go up, the company will have to blow the Street away.

For reasons that, in my opinion, lack any basis in theory, Wall Street excludes not only pre-IPO stock option costs from pro forma EPS but also Google Stock Unit grants, a practice that seems both mindless and indefensible.  Google has started to go along with this convention, however, and the combination of this, plus wild tax rate swings and extraordinary expenses, has rendered the company's pro forma EPS numbers irrelevant.  As a result, we will once again confine our estimates to Net Revenue (the company's revenue once traffic acquisition costs have been deducted) and the stock reaction.

So, as with last quarter, to enter the quarterly earnings sweepstakes, please submit the following estimates:

1) Q1 Net Revenue

2) The price at which the stock will open the next morning.  (Last quarter, we asked for the percentage change from the previous close, but since we don't know what the stock will do between now and next Thursday, picking a price seems more fair).

To provide some context, the current Street consensus is $1.45 billion, up 82% from last year and 12% sequentially (with a range of estimates from $1.38 billion to $1.54 billion).  This compares to $1.29 billion, up 97% y/y, in Q4.  In other words, the Street is already expecting a significant slowdown in Y/Y growth.  The Street is also expecting only slightly more sequential growth in absolute dollars than in the Q4-Q1 quarters last year ($160 million this year versus $140 million last year.  This compares to $240 million from Q3-Q4 this year versus $150 million in the same periods last year--a much bigger jump).

For what it's worth, the above analysis suggests to me that the Street numbers are conservative.  My own estimate, therefore, would be $1.5 billion, up 89% year-over-year.  If the company posted this number, I think the stock would open around $400.  For the stock to immediately march toward a new high (above $470), I think the company would have post a number in the $1.6 billion-range, which would constitute a year-over-year acceleration.  Based on Google's previous performance, this isn't impossible, but I think it's unlikely.

The other thing I wonder is whether Google's accounting changes--and the resulting hit to cash flow--will spook investors.  Given Wall Street's treatment of GSUs, analysts will probably pro forma the changes away, but the performance of other stocks suggests that such changes matter.

Reminder: I don't own Google, this isn't investment advice, and your guess is as good as mine.  Actually, come to think of it, I do own Google--indirectly, in an index fund, which was just forced to load up on it.

Comments

[Googleholic]

1.59B
$460

[King Troll]

What do you guys the think I should do?

Here is my portfolio:

CHK - bought $15 - now @ $31
CSCO bought @ $18 - now @ $21
SIRI - bought @ $2.50 - now@ $5.50
SONS - Bought @ $5.50 - now @ $5.20

I'm up pretty good over about 1 1/2 years.

My $5000 is at about $7000.

If I seel SONS and CSCO i'll have about $3000. I'm thinking of buying about 30 shares of APC or maybee MOT?

What do you think?

[Robert]

1.45 B
385

[ndame]

$1.429b in revs
$440.64 opening price

[Ron Belt]

1.52bn, $379

[rick]

$1.58 billion & $429

[Pete]

1.55 bn, $370 (net rev. beats but disappointment elsewhere)

[Neal Lachman]

$1.31B & opens at $385

[yahoogle]

$1.47B revenue and opens at $375

[Market Participant]

Sell CSCO, SONS, and SIRI. Buy KFN, NCT, DRY. You can thank me in a few years. CHK is a good company, XEC is also nice if you want an energy stock.

Market Participant

[Money]

Google earnings come out at 4.30 EST on Thursday 20th with options expiration on 21st. If the P/C ratio has anything to do with it a) IMHO GOOG opens up $10-25. b) May end the day marginally up.

c) I expect revenue numbers to be up huge but d) EPS to be less than 1.97 as more shares have been issued.

Having made 4 predictions I'll be happy if I get 2 correct in this market.

[Paul Mc Namara]

Revenue of 1.48 billion
Opening price of $430

[Joe]

rev - slightly above $2B
price - 15-20% rise from prior day close price

[Jonathan P. Biznatch Jr.]

how this yhoo stuff gonna go down tonite.

i say yhoo will stink it up again like usual

[King Troll]

How about some advice on my portfolio assholes.

thanks bros

[SanMan]

$1.55B, $410

To Chetan - feel free to not visit the IO, if Henry's age bothers your or the topics he covers dont interest you. Lots of other sites talk to other stocks which may catch your fancy.

[shinkdew]

$1.47B, $380

[Victor]

Yahoo only meets consensus, but up almost 5%. This shows the market is pretty oversold and bodes very well if GOOG can beat.

[mikey]

Henry,

Can you project an estimate based on YHOO's report?

[Scot]

I second Mikey's request. Given Yahoo's report it seems everyone will need to recalibrate their projections, and I'd like to hear your thoughts on Yahoo's report versus what Google may report on Thursday.

[Victor]

I'd like to up my numbers based on what happened to yahoo:
net rev: 1.54B (same as before)
opening at $435

[Neal Lachman]

King Troll,

This is an a-holes responding to you ;-)

Your returns are at $7K from $5K within approx. 1.5 year! I think, with a IRR of approximately 30% per annum you are doing much (greatly) better than most hedge funds. I wouldn't worry too much about us advicing you. Go with your guts, invest with caution but with confidence. On your portfo I'd say DO NOT sell Cisco, it will become only more valuable in the next ten years.

I would diversify out of tech for almost 20% of your total value (that would be $1.4K), and if I were you I would take at least 20% from my annual profits to reward myself and buy flowers and Godivas for my girlfriend and mom.

Investing is only fun if you are making profits, and profits are only fun if you can enjoy them.

Regards, Neal

[Market Participant]

I would get the hell out of tech, much too risky for any serious investor. If you must have tech, then it makes sense to get out of tech stocks and switch to a tech ETF such as MTK (Morgan Stanley Technology ETF).Individual stocks are very risky, so an ETF which coveres a pool of stocks offers less risk via diversification.

Now is the time to buy income producing assets. I would seriously recomend purchasing shares of the ETF "PID". It covers international stocks that have raised dividends for over 5 years. KFN (KKR Financial) is also nice, it's KKR's Real Estate investment trust, that also does some private equity work. Pays out a hefty dividend of $1.60 a share.

[Neal Lachman]

MP,

I completely disagree with your strategy. First and foremost, it depends on the investor's own field of interest in what s/he should invest. I also cannot imagine every single investor to be willing to invest in REITs or cyclical or blue-chip stock.

Investors know that with high risks there comes high rewards, if any. Divident paying stock maye be set off against a stock that is interesting (in demand) over a period of time, which ALMOST guarantees a higher price (upward spiral), which is what the management teams work their butt off every single quarter.

I can write a whole essay on that, but this is not the place to do it. In terms of our dear brother King Troll's portfolio I have recommended to diversify at least 20% in NON-TECH. But that is what EVERYONE should do. I cannot advice him to run into ETFs because those may not have the charm of individual stocks.

Maybe King Troll should listen 50% to you and 50% to me, in that way he has done something 2 a-holes recommended ;-) If he chooses to do so, he should thus diversify 20%=$1.4K into NON-TECH stocks, and $2.5K in individual stock (including csco I would say) and $2.5K in ETFs (if possible) and buy beer and flowers for the remaining couple of hundred dollars. This way he has diversified strongly and spread his risks (hedged, one could say).

If he doesn't want to buy beer, flowers, and chocolate for the remaining $600 he could follow your advice and buy into KFN, indeed. This way he is solid hedged against any downturns in any or some of his holdings.

King Troll, I hope you are enjoying me spending time on your portfolio! ;-)

[King Troll]

You guys need to understand that I cannot buy stocks that deal in interest, gambling, porn and other openly sinful business. I also try to avoid companies that pay interest on loans. It's hard to find many good stocks that meet these criteria.

I used to buy 100% tech stocks on margin from 1997 (got in heavily after the Asian crisis) to 2001. I had about $600,000 when I was 20 years old then got completely wiped out after the internet bust. When I was about 22 I became $30,000 in debt. I went back to school and received accounting and finance degrees. Got a job at PWC and started selling China imported items on Ebay at night. Have been going on 4-5 hours of sleep per night bros. That money allowed me to pay off all debt and recently open up a chain of apparel stores. I use the stores’ cash flow to expand and avoid all debt. I've just begun to get back into investing in stocks, so I’m a bit cautious going forward and dealing with usury and sin stocks.