Analysts Put Google in the ‘Penalty Box’

Analysts Put Google in the ‘Penalty Box’

REUTERS/Jacques Brinon

Google’s (GOOG) share price nosedived on Friday after the search giant announced disappointing fourth-quarter profits and revenues late on Thursday. Analysts had been projecting EPS of $10.50 a share; Google came it at $9.50. Ouch. But the 8 percent plunge in the stock’s price – an immediate and understandable response on the part of investors who have come to count on Google to deliver growth in a world in which that is becoming increasingly scarce – may not be an end to the matter.

For one thing, there are the long-term questions about the kind of growth that Google can continue to generate in the future. Europe is battling its own economic woes, and that hurt Google’s international growth.
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Then there’s the fact that new kinds of advertising – like ads put on mobile phones – are less lucrative for Google than traditional online ads. Operating expenses are climbing, as Google pushes to compete with social networking giants (with the buzzed-about Google Plus) and online video (thanks to the YouTube site.) Canaccord Genuity analyst Michael Graham responded to the news by trimming his price target and earnings estimates for the company for 2012 and 2013.

But even if you share the long-term optimism of analysts who remain upbeat about Google, such as Ken Sena of Evercore Partners, who praised the company’s strategic focus, there’s a more immediate concern. “Google will likely be in the penalty box for at least a quarter,” warns Canaccord’s Graham.

For Kevin Pleines of Birinyi & Co., the worry is even more immediate than that. Google, known for consistently beating analysts’ estimates, is taken out to the woodshed whenever it disappoints. And that reaction, Pleines warns, isn’t confined to the immediate reaction of the kind seen Friday. Since Google’s IPO in 2005, Pleines note that when the market beats up Google following a disappointing earnings result, the stock goes on to fall another 8.3 percent, on average, before hitting a low an average of 33 days later.

Of course, history isn’t destiny. But it does offer a guide, and in the absence of any bullish or upbeat news affecting Google, this may be one more reason to avoid snapping up the stock as a “bargain” after Friday’s selloff, and wait and see until, oh, say, February 22. Even then, Pleines cautions, it takes an average of 78 days for Google stock to recover to the levels at which it was trading prior to the disappointing earnings report. The stock may still be a long-term buy, as many analysts insist, but it might be worth pondering that technical history when deciding when and at what price to actually