Bloomberg News

Google Drops as Net Misses, Microsoft Bids for Yahoo (Update5)

February 01, 2008

Google Inc. (GOOG:US), the most popular Web search engine, fell the most since it went public after fourth-quarter profit missed estimates, signaling investors have soured on one of the fastest-rising technology stocks of the decade.

Google lost $48.40, or 8.6 percent, to $515.90 at 4 p.m. New York time in Nasdaq Stock Market trading, the biggest drop since its August 2004 initial public offering. The decline, which dropped Google from the 20 biggest U.S. companies by market capitalization, came the same day Microsoft Corp. bid $44.6 billion for Yahoo! Inc. (YHOO:US), Google's closest rival.

Sales growth of 52 percent wasn't enough for some investors, who had watched Google beat profit estimates in 11 of the previous 13 quarters. An economic slowdown and a drop in online traffic may be crimping ad spending. Google also received less money than expected from ad deals with social-networking sites such as News Corp.'s MySpace.

``You've seen the peak in the pace of growth,'' said analyst Clayton Moran of Stanford Group Corp. in Boca Raton, Florida. ``They're probably not going to be able to repeat the 60, 70, 80 percent growth rates that they had in the past.''

Today's decline follows the worst month for the stock since Google's IPO, the biggest technology offering in the past four years. The stock reached a record high of $741.79 on Nov. 6.

Lower Targets

Analysts at Lehman Brothers Holdings Inc., Goldman Sachs Group Inc., Citigroup Inc. and Bear Stearns Cos. cut their price targets for the shares after yesterday's report. Jefferies & Co. dropped its rating to ``hold'' from ``buy.''

Fourth-quarter net income (GOOG:US) rose 17 percent to $1.21 billion, or $3.79 a share, from $1.03 billion, or $3.29 a share, a year earlier, Google said after the market closed yesterday. That fell short of the $3.91 average analyst estimate in a Bloomberg survey.

Sales, excluding revenue passed on to partner sites, climbed 52 percent to $3.39 billion. Analysts in the Bloomberg survey predicted $3.45 billion. Excluding stock-based compensation costs, profit was $4.43 a share, missing the $4.45 estimate of analysts.

Google shares closed at their biggest discount ever to their 200-day moving average. Since its record high on Nov. 6, the stock is now down 30 percent.

Yahoo Deal

In bidding for Yahoo, Microsoft Chief Executive Officer Steve Ballmer is attempting the biggest-ever technology takeover after failing to compete with Google in the market for Internet search services and advertising, which may almost double to $80 billion by 2010. Google has grown faster than Redmond, Washington-based Microsoft in every quarter since the 2004 IPO as its search engine won more users.

``A combination of Yahoo and Microsoft will have lots of money to spend in the battle with Google,'' said Jack Neele, who helps manage $194 billion, including Yahoo shares, at Robeco NV in Rotterdam.

In 2006, Google forged an agreement with MySpace to provide online-search and advertising features on the site, the most visited social-networking service. The deal includes a guaranteed payment of $900 million over three years from Google to News Corp. (NWSA:US)

``I don't think we have the killer best way to advertise and monetize social networks yet,'' Google co-founder Sergey Brin said yesterday on a conference call with analysts. ``Some of the things we were working on in Q4 didn't pan out, and there were some disappointments there.''

Microsoft `Pounced'

Microsoft saw an opening in that admission, said analyst Brian Bolan of Jackson Securities LLC in Chicago.

``Microsoft sees the Google challenge in this space as a weakness and has pounced,'' he wrote in a note to investors. ``They believe the recent weakness in Google makes this the best time to get the deal done.''

Rising energy costs and a housing slump pushed down consumer confidence to almost a two-year low in January, according to the Conference Board. Google investors (GOOG:US) are concerned that customers may respond by cutting their ad budgets. The number of U.S. Internet queries dropped 3.9 percent in December, according to research firm ComScore Inc.

``There is no evidence to date of an economic slowdown,'' Google Chief Executive Officer Eric Schmidt said in an interview yesterday. ``If there were, we would be pretty well positioned.''

Market Share

The company's share of the U.S. Internet search market rose to 56.3 percent in December from 50.8 percent at the end of 2006, while Sunnyvale, California-based Yahoo's share fell, according to Nielsen Online.

Google accounted for 75 percent of U.S. search advertising in 2007, up from 60 percent in 2006, according to New York-based research firm EMarketer Inc.

The company also is seeking to bring advertisers to its YouTube video site. Google began letting marketers buy ads in YouTube clips last year. Last month, YouTube opened up its complete library of homemade clips and television shows to mobile-phone users.

YouTube is seeing ``strong user growth,'' Brin said on the call. The site is now available in 17 languages.

Google also started selling ads on Web sites designed for mobile phones. In 10 to 20 years, most Internet searches will be on mobile devices, Schmidt said.

To contact the reporter on this story: Ari Levy in San Francisco at Alevy5@bloomberg.net

To contact the editor responsible for this story: Cesca Antonelli at fantonelli@bloomberg.net

A man rides his bike past a sign at Google Inc. headquarters in Mountain View, California Oct. 15, 2007. Photographer: Kimberly White/Bloomberg News

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Companies Mentioned

  • GOOG
    (Google Inc)
    • $571.6 USD
    • 2.40
    • 0.42%
  • YHOO
    (Yahoo! Inc)
    • $38.51 USD
    • 0.20
    • 0.52%
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