Google Good but Not Good Enough

A sign is displayed outside of the Google headquarters in Mountain View, California.
Getty Images
A sign is displayed outside of the Google headquarters in Mountain View, California.

Profits soared, revenue climbed and just about every other metric used to measure Google seemed strong in the company's fourth quarter.

But when expectations reach fever pitch, whether realistic or not, heaven help the company that just doesn't measure up.

Google didn't measure up.

The company reported $6.79 a share in earnings and $4.95 billion net revenue. And while the Street's earnings expectations are a distant image in the rear view mirror, that topline number was essentially in line, and therefore simply not good enough. Says Sameet Sinha at JMP Securities: "…Top-line fell slightly below expectations. I think that is because costs per click was up about 2 percent sequentially and we had been expecting closer to 5 percent growth."

"The reason the stock is down is that it wasn't a blow out," says Janco Partners' Martin Pyykkonen.

Google Sites revenue was in line at $4.42 billion, but Networks surged to $2.04 billion versus the $1.97 billion expected. International business was in line with $3.52 billion; Traffic Acquisition Costs in line at $1.72 billion. Trouble is, "in line" is a dirty word when talking Google parlance.

The good news: The company's coffers swelled by $2.5 billion and Google's cash position is now $24.5 billion. The company's headcount only grew by a couple of hundred new workers, and capex spending during the quarter was only $221 million when some on the Street were expecting better than twice that figure.

Still, all of this translates into a $30 decline in Google stock, or about 5 percent. Part of that is the revenue figure, but while Google's Eric Schmidt in the release tonight says he is "hugely optimistic" about the internet in 2010, Google will be aggressively spending in the months to come. Schmidt says that his company will "continue to invest heavily for the long term." With a company like this, with a track record of excessive spending, that might be raising some concerns despite Google's relatively recent discipline when it comes to costs. All that aside, look for a lot of commentary tomorrow about buying these shares on the dips.

The fact of the matter is, the economy is turning around, and whether Google meets or beat expectations, the company is better positioned than any other tech/media company to take advantage of it. The company's growth may not be up to snuff, but that isn't Google's problem. It's Wall Street's, which may be getting ahead of itself when it comes to evaluating what's realistic when it comes to expectations, and what's realistic when it comes to determining just how much money Google ought to be making.

Google is getting the job done, with Schmidt saying tonight that the company performed well across the board, growing exceptionally well, and seeing "terrific momentum" in its enterprise business. Schmidt also said that the company's Android mobile operating system is a "pretty clear success."

When Wall Street ratchets down its expectations to something more reasonable, Google may finally be appreciated for the growth engine it has truly become.

Embrace the figures tonight for what they are, and consider Google's shares tonight as more "on sale" than a "sell-off."

Questions? Comments?