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No Margin For Error

By - February 04, 2005


The chatter about Google lately, as a stock, is that it is “priced to perfection.” In other words, Wall Street is expecting Google to perform flawlessly over the next year or so. If it does not, the stock will tumble. And what is flawless? Oh, how about a doubling of earnings in one 12 month period – on top of a recent quarter where they already doubled? Would you want to have to manage against that expectation? Nope, me either. This is exactly the kind of pressure that Larry, Sergey, and Eric said they would not pay attention to when they dropped that bomb of an S1 on the world last April. To quote from it:

As a private company, we have concentrated on the long term, and this has served us well. As a public company, we will do the same. In our opinion, outside pressures too often tempt companies to sacrifice long-term opportunities to meet quarterly market expectations. Sometimes this pressure has caused companies to manipulate financial results in order to “make their quarter.” In Warren Buffett’s words, “We won’t ‘smooth’ quarterly or annual results: If earnings figures are lumpy when they reach headquarters, they will be lumpy when they reach you.”

If opportunities arise that might cause us to sacrifice short term results but are in the best long term interest of our shareholders, we will take those opportunities. We will have the fortitude to do this. We would request that our shareholders take the long term view.

Many companies are under pressure to keep their earnings in line with analysts’ forecasts. Therefore, they often accept smaller, but predictable, earnings rather than larger and more unpredictable returns. Sergey and I feel this is harmful, and we intend to steer in the opposite direction.

Now that Wall St. has really put the pressure on, it will be interesting to see what happens. My guess is Google will stick to its original principles, miss analyst expectations, and the stock will go up anyway.

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2 thoughts on “No Margin For Error

  1. shanan says:

    Will it go up steadily, or have a lumpy ride and still trend up?

    I’m curious? I’m trying to remember what the sages at The Times said about this new, subdued Internet bubble yesterday.

  2. Seun Osewa says:

    I believe that, if they miss expectations because of actions of competitors (e.g. Microsoft starting its own ad network, Yahoo/MSN search getting more market share), or a dramatic (read:amplified by the media) by google, the stock will go down.