Google Keeps 'Em Guessing

It's yet to learn that giving guidance could be a boon.
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The worm has turned.

Yes,

Google

(GOOG) - Get Report

missed its numbers -- big time. And judging from the initial reactions, you might think the SS Poseidon had just been knocked over on its smokestacks. Half of the luxury liner's passengers are heading back to the deck, the other half madly banging their high heels and cufflinks on the keel -- and none of them are quite sure which way is up.

Where is Gene Hackman when you need him?

In hindsight, the signs of a letdown were there all along. The

technical charts warned it might happen.

Yahoo!

(YHOO)

had

seen a slowdown in its search revenue -- but the Google bulls interpreted it as a sign that Yahoo! was losing market share. Then some yahoo at Yahoo! predicted on his blog that Google would disappoint -- causing a stir in blogland.

Most unsettling of all, analysts who had been falling embarrassingly short of their price targets on Google switched -- in the past few months -- to embarrassingly optimistic price targets. The trend culminated in the now-infamous

$2,000 price-target-that-wasn't-a-price-target (At $366 just after its earnings report, Google was a mere 18% of the way there.)

Those bullish analysts share part of the blame for Google's price volatility. To justify their bullish price targets, they projected bullish earnings forecasts. And all that happened Tuesday was that Google fell short of the towering EPS figures erected to support increasingly incredible stock targets.

A lot of people had been cheering Google for its refusal to play Wall Street's guidance game. With $19 billion stripped out of the stock's market cap after the close on Tuesday (the stock had recently worked itself back to about $400 early Wednesday), you have to wonder how many of them are smarting now because Google's refusal to issue guidance allowed the market's expectations to spin out of control. The guidance game may be onerous, frustrating, complex and even silly, but it's played for a reason: so that investors have an idea of what's coming.

So, a lot has changed for Google investors, only not what you might expect. Google hasn't jumped the shark, financially or technologically. It's still the undisputed leader in search, and it has a lot of interesting cards up its sleeve for future growth. It will be outperforming most Internet companies for some time.

This is a company whose fourth-quarter revenue grew 86% from the year-ago quarter and whose profit grew 67%. It's a company that after eight years in business had brought in $6.1 billion in revenue and $1.5 billion in profit.

This is not a company veering toward the shoals of financial turmoil.

Instead, what's happened is that, as of Tuesday, Google has gone from a stock you could pretty much rely on to ratchet higher, to a wildly unpredictable investment. Actually, more like a gamble than an investment. Will Google hit $200 or $2,000? Will the ball land on red or black? It's anybody's guess now.

That's because Google is above giving any guidance -- any hint about the business you bought a piece of, any peek into its financial forecast, any tiny insight into whether you should or should not hold the stock. For some time now, Larry Page, Sergey Brin and Eric Schmidt have been thumbing their triumvirate nose right at you, a shared owner in Google. But it just wasn't until Tuesday that it became clear.

During its first six quarters as a public company, Google had shattered analysts' forecasts by a minimum of 11% and a maximum of 41%. Google shareholders liked that a lot. On Tuesday, though, it fell short by an unlucky 13%, posting earnings per share of $1.54 vs. Wall Street's mean estimate of $1.76.

"The bloom is off of Google," wrote Scott Devitt, an analyst at Stifel Nicolaus, who was one of the few analysts to publicly predict a Google disappointment after Yahoo! posted its earnings. "Search is still a high-growth business long-term and Google is the leader, but shares will likely face a period of consolidation as unrealistic expectations are tempered." (Stifel Nicolaus has no underwriting relationship with Google.)

So, what happened? "Most of the miss is related to the tax impact," CFO George Reyes said on the conference call. If you're curious about how that tax impact came about, Google will only say its domestic tax rate soared to 42% in the fourth quarter because it invested a disproportionately high amount of expenses overseas. And if that makes little sense, just know that in 2006 Google again expects a tax rate of 30%.

This is not exactly what's known in the common parlance as 'splainin'.

The lack of guidance also has turned Google's quarterly earnings into a mosh pit of confusion. Last July, Google's stock seesawed amid confusion over

whether it missed or beat second-quarter numbers.Google's PR staff had to phone up reporters and straighten them out on numbers that the company should have been up front about all along. Yet few reporters were confused about the numbers posted by other Internet companies.

What the company's triumvirate doesn't see is that it isn't just investors who benefit from guidance, it's Google. First of all, the company is battling a public perception problem. Like it or not, Google's stock is as prominent an image of the company as its beautifully minimalist home page. And if and when people dump the stock long term, that will gradually affect the number of people who use its search engine.

Second, and more immediately for Google, it's employee morale is now tied up in the millions of stock options it's doled out to bring the best and the brightest to the Googleplex. What if the stock does -- irrationally or not -- dive downward? That's going to make it easier for Google's rivals to lure away employees, and leave the ones left behind feeling cheated out of the fortunes they dreamed of.

In its IPO prospectus, Google warned it would be this negligent toward investors in order to preserve its competitive edge. That doesn't make this volatility any easier to swallow, and it doesn't make Google any less negligent. Anyone who's lost money on Google's earnings report deserves to let the company's top execs have it at full volume. How exactly does a warning about a tax charge blunt Google's competitive edge?

Now it's finally sinking in: Google wants your money. But they won't give you the time of day for it. You just have to place your bets and hope luck is smiling on you. That may be fine when the stock is rising ever higher. But faith-based investing starts to wear thin when the stock is as volatile as this.

Or maybe there's more sense in that wretched song in the

Poseidon Adventure

: There's got to be a morning after, if we can hold on through the night.

I mean, there's

got

to be ... right?