Google Q2 Solid, Stock Expensive, Little New

Oh, yes, Wall Street panicked--that's new.  It's hard to say whether the 7% aftermarket plummet was the result of margin slippage (the popular story) or the stock just having been too damn high in the first place, but all the hand-wringing about an "earnings miss" is almost certainly an overreaction.

Google's expenses were higher than expected because:

1) They hired more people than they planned to, and
2) They changed the way they account for bonuses, which required a "catch-up" from Q1. 

The second factor is a one-time item that is unrelated to the company's performance (translation: It's irrelevant).  The first factor, the "over-hiring," could indicate a problem, but only if you believe Google's management is full of it. 

Companies generally "overspend" for one of two reasons.  Either they spend according to plan but their revenue falls short and they try to hide it by blaming spending (which is bad, especially for a growth company like this), or revenue comes in where they think it will and they actually just...overspend. 

Google's revenue performance in the quarter was just fine--a steady, modest deceleration in year-over-year growth, with weakness in the Adsense network and exceptional strength on the far-more-profitable Google.com.  Eric Schmidt also said quite clearly that the company simply hired more people than it expected to.  So, in this case, the "overspending" was quite likely the benign, one-time kind.

Free cash flow, meanwhile, is continuing to grow again, after more than a year of stagnation while the company poured billions into data centers, servers, and real-estate.  At a current run-rate of about $2.6 billion, Google should exit the year with about $3 billion in free cash flow.  Now that the stock is back in the $500-range (Wall-Street's aftermarket fibrillation having sliced $20 billion off the market cap), that translates to about 50X-55X free cash flow.  Expensive.  Not outrageous, but expensive.

And we would be remiss if we did not once again take the opportunity to step back and gape in awe at a company that didn't exist 8 years ago now generating $15-plus billion in annual revenue and $4 billion in profit, all from organic growth.

Comments

[question guy]

One question- where the heck is fuckedgoogle.com when you need it?

:-)

[DayNovo]

Google did indeed come up with a miss today - no doubt about it. But is it fair to state, as some reports have, that the stock "tumbled" after hours? For more consideration click here:
http://sneakybusiness.typepad.com/sneaky/2007/07/google-misses-s.html

[Tate]

Agreed Henry.. this sell off is a bit of an overreaction to these one time costs. I wrote up a full analysis your readers might be interested in: http://selfinvestors.com/tradingstocks/company-earnings/google/google-goog-sell-off-offers-opportunity-strong-technical-support-at-500/

[Royal]

Henry, this "miss" reminded me of their last miss in Feb 2006.

That last miss was because GOOG pulled aside $90m to start a charitable fund but never instructed analyst (even during the conference call) that this one-time charge should be pulled out of the operating numbers.

We can attribute this miss to GOOG pulling aside what I read was a $60m "catch-up" accounting treatment -- or about 19 cents per share.

An extra 19 cents a share would have had GOOG beating by 16 cents.

I can understand not giving analyst guidance *before* the conference call... but why would GOOG not instruct analysts *during* the conference call to pull this one-time acct treatment out of the operating numbers?

Imagine if all the headlines read, "GOOG Beats Again" instead of "GOOG Misses" ?

Do I have this thinking wrong? If I don't, why didn't a single analyst or news agency actually run the numbers... ?

[Royal]

P.S. You covered the last miss here: http://www.internetoutsider.com/2006/01/google_fun_whil.html

'The early brouhaha about an "earnings miss" seems overblown, because much was attributable to the company's gift of $90 million to the Google Foundation and a spike in the tax rate.' Internet Outsider Jan 31, 2006

Why doesn't GOOG just do the math for everyone?? (Then and now.)

[Sufiy]

Google GOOG Earnings and Growth are Falling further
The most important ring bell for all Google shareholders should be falling by 12% margin from almost constant before 33% to 29% of revenue. With increase in revenue of 58% Y/Y Google demonstrated falling growth rate of -25% Y/Y. Google network growth is falling even more faster by -38% Y/Y due to heating up competition. Net Income actually fall from 1billion to 0.9 billion comparing to the 1st q 2007. Total cost and Expenses are growing 116% faster then revenue growth rate Q/Q. Sales per head is down by -6%. With all this deteriorating fundamentals investors still were ready to pay last Thursday 548.59 which brings Google to valuation of P/S=12.9, P/E=47, P/FCF=74. Even if Google...
http://sufiy.blogspot.com/2007/07/google-goog-earnings-and-growth-are.html