Google Misses by a Mile

Updated from 4:35 p.m.

Google GOOG missed Wall Street's fourth-quarter profit view by a wide margin Tuesday, sending its shares tumbling 15% in after-hours action.

The Mountain View, Calif., company made $372 million, or $1.22 a share, up from the year-ago $204 million, or 71 cents a share.

More important, the search giant put its non-GAAP earnings for the quarter ended Dec. 31 at $1.54 a share. Analysts surveyed by Thomson First Call were looking for $1.76. Net revenue, excluding the money Google shares with advertising partners, was in line with estimates at $1.29 billion.

One surprise came on the tax line, where Google had guided for 30% but came in at 31.6% for the year and 41.8% for the latest quarter. The company cited a rise in costs internationally.

"Initially, the tax rate was a negative surprise," says Tim Ghriskey, chief investment officer of Solaris Capital Management, which owns Google shares. "Estimates were at 26%."

"Most of the miss was related to the tax impact,'' CFO George Reyes said on the company's postclose conference call with analysts. Google said it expects the tax rate to be back around 30% for 2006.

Another surprise came on the expense side, where Google saw both capital spending and overhead costs rise more than expectations.

"We are scaling this business rapidly and we are investing for the long term," said CEO Eric Schmidt on the call, saying there will be more focus on advertisers and more spending on search technology. "This remains a unique and historic opportunity."

Wall Street was stunned by the miss, sending the stock to levels not seen since Halloween. Investors had been hoping Google would roll out its usual blowout quarter and compensate for the poor showing of rival Yahoo! YHOO two weeks ago. Instead, Google added to swirling concerns about the tech sector.

The stock dropped 16% immediately as trading resumed after a postclose halt, then bounced around between 13% and 17% down as the conference call got under way. Google, which last fetched $360 at the end of October, was at $366 at 5:10 p.m.

Speaking of the company's runaway stock gains and rich price-to-earnings multiple, Ghriskey adds, "This is a company that's priced for perfection and it didn't deliver perfection today."