Google finds new tech expectations hard to meet
By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Google has found the expectations of new technology hard to meet. The Internet giantâs revenue rocketed 25 percent in the fourth quarter, but its shares still plunged 9 percent after hours on Thursday. Google failed to match Wall Streetâs hopes, whereas Microsoft and IBMâs more pedestrian results – and Intelâs closer fit with analystsâ forecasts – reassured. In uncertain times, the tech sector old guardâs predictability can trump edgier possibilities.
Though the search firmâs sales fell short, they are still surging as more people click on paid links, watch videos on YouTube and look at advertisements on their screens. These trends have plenty of room to run. And the companyâs two newest platforms, mobile devices using the Android operating system and social network Google+, promise to deliver more ad dollars. About 700,000 Android smartphones are being lit up every day. And Google+ has 90 million users, more than double what it had at the end of the third quarter last year.
But Googleâs growth is costing money. Its expenses rose in the fourth quarter, and the amount advertisers were willing to pay per click fell, resulting in net income increasing only 6 percent from a year earlier. Thatâs not that much better than the earnings increase posted by the distinctly mature Microsoft, whose income was flat, and centenarian IBM, where it rose 4 percent. And Googleâs profit increase was only in line with Intelâs, even though the chipmaker is so far an also-ran in the shift to mobile computing.
It didnât help that Google reminded analysts that costs will increase in the first quarter, while IBM told investors that next yearsâ earnings will be slightly better than expected. People have come to hope for more from Google, and they accord the company a correspondingly higher valuation multiple. Before Thursdayâs news, the company traded at 14.5 times estimated earnings for 2012, compared to 10 and 12 respectively for Microsoft and IBM.
With markets skittish and Googleâs performance highly geared to cyclical advertising, it looks as though investors arenât giving the company much benefit of the doubt that high profits will follow revenue growth. More mature tech firms, on the other hand, have the luxury of softer expectations.