After the Internet search giant reported disappointing quarterly results, the stock fell a breathtaking $50, but value buyers stepped in to pull Google off the lows. Where Google trades from next is the real question.
In order to answer it, let's examine the quarterly results and what they mean to investors. The hits sinking the share price started with margin compression. Google entered into areas outside its core and highly profitable advertising model, shrinking overall margins. Gross margin fell to 57%, a drop of 2 percentage points from the corresponding period last year.
Net margin fared much better and fell slightly to 23%. I wouldn't get overly anxious about the decline. Changes were or should have been expected as Google expands its offerings.The next hit investors took is from earnings per share. Google reported $9.56 per share, significantly less than $10.78 the Street was expecting. This is nothing new for Google. The company has missed -- or rather, analysts' expectations have been overly optimistic -- one out of three quarters in the last three years. This explains why the option premium was sky-high into the report. Again, I don't believe the EPS results were that awful, and based on the price recovery off the lows during Thursday's after-hours trading, the market agrees. Revenue didn't exactly "get some." Investors were looking for $14.46 billion, and Google received $14.11 billion. This number is significant, even though initially it may not appear so. My takeaway is that Google isn't expanding as fast as Wall Street assumed, at least not for this quarter, and that may constrict the price to earnings multiple. Compared to Microsoft (MSFT), Google trades at a 50% relative earnings multiple premium. If investors' lose confidence on top- and bottom-line growth, often measured with more weight on the top line, the share price may not find an easy path higher. Google currently trades near the same multiple assigned to Yahoo! (YHOO).
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