Google Tops Earnings Expectations–But Not Investors’ Hopes

As expected, Google turned in a more than decent first quarter, with profits up 37%. But just as in the fourth quarter, investors were hoping for even better, sending the search giant’s shares down 3% or more in early after-hours trading. No big surprise here: If anyone were expected to beat already heady expectations, it would be Google. For one, it weathered the recession better than just about anyone, and for another, search ads–which can be stopped and started in a nanosecond–were expected to rebound quickly with the overall economy.

Now,  investors will be looking for guidance into the future, which Google is always cautious about providing. I won’t be able to tune into conference call, now underway, but you can here. And the Wall Street Journal is liveblogging it here. Here’s the release.

Update: The stock fell an eye-opening 7% Friday, though on a bad day for the overall markets. It seems that investors are most concerned about Google’s higher-than-expected expenses–understandable, given that the company added almost 800 new employees in the quarter, the most in years. Still, given the jump in profits, and the clearly optimistic comments from Google executives, several analysts remain positive, including S&P’s Scott Kessler, who wrote this in a note Friday:

GOOG is down 7%, as investors seem concerned about certain operating expense items that were well above our forecasts (as GOOG sequentially added 786 people, the most in two years), and the absence of CEO Eric Schmidt from the conference call. We think GOOG reported strong Q1 results, including its highest revenue growth since Q3 ’08, an operating margin of 41%, and well controlled capex. Given the notable growth prospects we see, talented and stable management, and $27B in net cash and short-term investments, we believe today’s sell-off is an enhanced buying opportunity.

Likewise, Broadpoint AmTech’s Ben Schachter remains upbeat on the long-term, but he says GOOG will be a show-me stock for the near future, until the company can demonstrate its next growth market–probably its still-nascent display-ad business, including mobile ads:

GOOG delivered solid revenue growth, up 22% ex-FX and hedging (an acceleration from 4Q’s adjusted growth of ~16%). There was broad strength across Google.com sites, partner sites, and many verticals and geographies. The operating margin came in at 54.9% as the company resumed hiring, adding ~800 heads. Additionally, we estimate that sales of ~200k Nexus One phones negatively impacted the gross margin by ~130 bps. Capex remained low at just $239mil, which will help the gross margin line going forward. The bottom line is that overall numbers were good, but with the stock up 5% in the past five days, expectations were on the rise heading into the call. Operating expenses were higher than expected, and the company failed to deliver enough top-line upside.

Our near-term concern is a lack of catalysts to drive the stock, while longer-term, many investors continue to worry about mobile threats and GOOG’s ability to grow emerging revenue streams fast enough to meaningfully move the needle. We remain convinced that the core business has many years of solid growth to come and that the emerging businesses of mobile, display, video, and enterprise offer tremendous opportunities. However, we suspect that the negative sentiment around the name will persist until GOOG can deliver meaningful upside or a new business ignites excitement about its longer-term potential. We are reiterating our Buy rating and $650 target, though the stock could tread water near-term.

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One Response

  1. [...] go to return to some semblance of its former glory. Yahoo’s quarter paled next Its key rival Google last week reported a better-than-expected first quarter, with profits up 37% and revenues up 23%. Even that [...]

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