When is a 37% increase in profits a bad thing? It is when you are Google and expectations for your company are totally out of whack. Google reported earnings yesterday and the earnings were solid. Top line growth was impressive with sales coming in at $5.06 billion dollars beating the $4.95 billion dollar average estimate. EPS came in at $6.76 beating most Wall Street estimates. Just about any other company’s stock would have rallied on such a report but not Google. Google’s stock declined nearly $30 after the earnings announcement. Why did Google drop so precipitously? it appears that Google has set the bar so high in the past that the company has become a victim of its own success.
The search engine giant failed to meet analysts top line projections. The highest estimates for Google’s were for $5.12 billion dollars in revenue and earnings per share of $6.91. Google is still a growth stock but the growth is slowing. With a $189 billion dollar market cap, analysts should set reasonable growth targets for Google going forward. Google’s earnings are expected to grow just shy of 20% over the next 5 years. Most tech firms would kill for this kind of growth. For Google however, this is just one half of the growth rate for the previous 5 years. Google’s earnings grew 43% per year over the past 5 years.
With shares retreating nearly 5% after hours and Google trading at $566, the stock may represent a compelling buying opportunity for long term investors.
I do not own any shares of Google.