Now that the major tech earnings parade has largely passed by, I have a chance to reflect on some bizarre developments swirling around both Google and Apple. This is the first of two blogs today, but I'll focus here on Google.
It's interesting to note, that both companies are caught in a strange whirlpool of shifting euphoria, great expectation--and then punishing share-price brutality when performance doesn't match up with what the experts were looking for.
Cases in point: Earnings news from Google and most recently Apple.
As I said, this post looks at Google. Last week, the internet search giant reported a 58% jump in sales, $3.87 billion.Excluding those traffic acquisition costs (TAC) the company came in at $2.72 billion. Pro forma earnings of $3.56 a share, up 28% from the same period a year ago, missed analyst expectations by 3 pennies. It was only the second time that Google missed estimates and the stock was punished. Badly.
But what were those expectations based upon? Past performance? Haven't we always been told that past performance is no guarantee of future results? Were expectations based on Google's own guidance? Google doesn't offer any. Were the expectations based on context clues from the search industry? Channel checks? Anecdotal evidence of some kind? Maybe. But I find it quizzical when Wall Street offers estimates, lofty as they might be, and when companies miss them, they get smacked.
I'm not saying that we shouldn't use estimates. When a company offers guidance and comes up woefully short, or dramatically ahead, of those numbers, investors should react accordingly. But when the crystal ball is particularly cloudy, and the Street puts estimates together anyway, investors should take those projections with a grain of salt.
When it comes to Google, I had this discussion with Laura Martin, the analyst at Soleil. She tells me "We have been enormously accurate on average. There's a large range between our estimates, a number of outlyers, but when you average our numbers, typically Google comes in, well, it's always come in above, in ten of the last 12 quarters they've been public. But, sometimes it's by 5%, sometimes it's been 10%."
Wait a second: Google has beaten ten of the last 12 quarters by between 5% and 10%, and yet Martin says the Street has been "enormously accurate" in its projections. Not by my math. So, I called her on that.
"At the beginning, Google beat us by a lot, but as you say, we learned, and so we started ratcheting up our estimates, but you see where this is going. It's going exactly where you suggest, which is we keep getting smarter, we input the data, we bring up the estimate growth rate and it is only a question of time until they miss," Martin tells me. In other words, it seems like the system has Google's disappointment practically designed in.
She says in the case of Google "we did a great job on the topline" coming within 1% of the actual number. What analysts got wrong was the huge amount of money Google apparently was spending on the quarter, hiring a record 1,548 employees. Analysts simply didn't know, and Google waited until its report to announce it.
Things happen. Things change. In Google's case, it needs to communicate more clearly with Wall Street, a complaint dogging the company since it first went public. In the Street's case, it needs to communicate more clearly with investors who hang on their every word to make important investment decisions that could make or lose a life's savings.
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