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Google Stock Drops 12 Percent As Expectations Top Earnings

By Saul Hansell
THE NEW YORK TIMES

After astounding Wall Street with its incredible growth, Google learned on Tuesday the perils of high expectations. An earnings increase that fell shy of investors’ hopes sent its shares plummeting after the close of the market.

Google’s stock fell almost 20 percent immediately after the announcement, made after the close of regular trading, then recovered somewhat. By evening it was down about 12 percent from Tuesday’s close, trading around $379.

Only three weeks ago, at its high-water mark, the stock reached $475.11. It has still been less than a year and a half since the company made its initial public offering at $85 a share.

Safa Rashtchy, an analyst with Piper Jaffray & Co., attributed Tuesday’s decline to “momentum investors” who had been betting that Google would continue to surpass published estimates. “This is one of the biggest momentum stocks there is,” he said. “They said this stock should be growing even faster. And when it doesn’t, they just get out.”

For any other company, the results announced Tuesday would be impressive. Google said it earned $372 million in the fourth quarter of last year, up 82 percent from the year before.

But the enormous valuation of Google is based — to the extent it has any rational basis — on predictions that it will continue to grow very rapidly, extending its success in Internet advertising to other Internet services and other forms of advertising. Signs of even a modest slowing in that expansion, relative to investors’ expectations, could have a large impact on Google’s share price.

Google’s aura of infallibility, moreover, has been clouded on other fronts in recent weeks. The debut of its video download store met with critical reviews. And its decision to introduce a Chinese service that filters out content objectionable to the Chinese government raised questions about its commitment to its informal slogan, “Don’t be evil.”

Google has been insistent about doing things its own way, and Tuesday’s surprise may be a consequence of its unusual policy of not providing guidance to investors about its anticipated financial results. Its shortfall was largely the sum of several modest drags on its results — developments that many other companies might have warned of in advance.