I was a young stockbroker on October 19th 1987. It was a very confusing day. It was one of those days that was a bit like being hit by a hurricane: you can’t really appreciate the total impact while you’re running for the cellar. The 508 point drop was beyond belief: clients and brokers never imagined that shares could trade in that quantity or plummet without any sense of a bottom. For those not around back then, the volume of around a half billion shares choked the NYSE computers and specialists so much so that confirmations for buy or sell orders placed on Monday weren’t returned until Wednesday or Thursday. If you placed a limit order, you either went unfilled or received a horrible execution, and if you placed a market order it was still days before you knew if your order had been executed and at what price.
In the weeks that followed, some investors sold all of their stocks and vowed never to return, and others bought. Tragically, many investors were heavily margined and were “playing” with option contracts and were wiped-out. Over the last twenty-five years, I’ve learned a lot of tough lessons. Two of the most important lessons I’ve learned are: in spite of apocalyptic predictions, the world hasn’t ended and likely won’t. Second, I’ve never seen anyone make money by panicking. We made it through 2008’s financial crisis, and we’ll likely survive the upcoming elections and fiscal cliff. None of that is to suggest that investing will ever be easy.
Yesterday, minutes before I appeared live on CNBC, Google’s earnings report was mistakenly released, and it wasn’t good. We’ve owned Google for quite a while and have endured and enjoyed its ups and downs. Michael Fox CFA, Keith Davis CFA, and Taylor McGowan CFA immediately scoured the release and sent me the following notes just before I went on air. I am so grateful to work with such bright talented people.
Google (GOOG) thoughts…
Quarter not as bad as numbers look at first glance. Remember Google does not offer any guidance, and the Motorola division estimates appear to have been way off.
Most of revenue-miss appears to be in Motorola division. Earnings miss was due to higher expenses in core Google and Motorola businesses that produced a loss.
GOOG core (ex Moto) net revs (revenues less traffic acquisition costs) was just 1% below expectations
Paid clicks grew 33% off a difficult comp (+28% y/y in 3Q last year)
Cost per click declined 15%, but with paid clicks increasing 33%, this produced 20% CC growth for gross revenues. Net revenues grew 16.6%, unadjusted for currency
GOOG core operating income grew only 9.9% on higher expenses (up 24% y/y). The release does not offer any explanation for these higher investment levels, and we would expect the company to offer more details on the conference call. (headcount, etc). The conference call outlook was indeed more detailed and more constructive.
Much of the issue is the lack of any real guidance on its plans for Motorola beyond taking time to evaluate that business. The company will likely take its time in reorganizing that division and focusing on the long-term and not being as concerned with the drag it might be on results over the next few quarters.
We maintain our conviction in high-quality blue chips US multinationals, which have finally started to perform better in recent months. These types of companies are attractively valued, defensive, offer dividends yields higher than the yields available on bonds (in many cases), and may offer some protection against sharp increases in inflation (relative to bonds). At this point in the market rally, it certainly may make sense to give up some of the potential upside in exchange for some downside protection in the event of stormy weather ahead.
Have a great weekend.