Analysts have difficulty reading Google

September 28, 2004

With Google's quiet period having ended Tuesday, analysts whose firms took the company public can better evaluate reports and recommendations for investing in the high-flying search company.

But investors will find researchers' predictions of the company's revenue and earnings as wide-ranging as a Google search for "confusion." Analysts say the questions will remain until Google itself points toward some answers.

"Without management guidance, you're going to see more variance in the numbers," said Stephen Jue, an analyst at RBC Capital Markets. "When they report their third-quarter numbers, there's likely going to be a big surprise to the upside or downside."

Google, whose founders indicated in their IPO prospectus that they planned to offer little financial guidance to Wall Street, is expected to earn 26 cents a share for the third quarter on revenues of $452 million, according to a consensus of analysts surveyed by Thomson First Call.

But the range is large. Analysts' estimates vary from a loss of 9 cents a share in the third quarter to a net profit of 37 cents, according to First Call.

Compare that with Google's archrival, Yahoo. Analysts expect Yahoo to report a third-quarter net profit of 8 cents to 10 cents a share, according to First Call. Yahoo, which provides financial guidance to Wall Street, will report its third-quarter results Oct. 12.

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"When a company does not provide guidance, it tests the measure of each analyst's work," said David Garrity, an analyst at Caris. "One approach is to size the market opportunity...and translate that into revenues and potential earnings."

Analysts are mixed on whether and to what degree Google's share price could suffer, if it misses analysts' estimates by a wide margin. After all, investors have previously been warned that the company does not plan to issue financial guidance to Wall Street and that it will be positioning the company for long-term growth.

"The stock will get hit equally hard (when compared with those companies that do give financial guidance), and I would not rule out the possibility it could be even more volatile," Garrity said.

Jue, however, said investors are expecting a lot of volatility in the stock, anyway, given that there is a small number of shares outstanding. Google has 271 million shares outstanding, compared to Yahoo's 1.4 billion shares. For Google, every couple million dollars in net income affects its earnings per share by 1 cent, Jue said.

"I think investors will be more forgiving, since Google said they are focusing on their long-term prospects," Jue said.

Issuing a value to Google will be difficult for investors, Heath Terry, a Credit Suisse First Boston analyst noted in his research report.

"Valuation is likely to be the most difficult issue for investors in Google for a variety of reasons, including the lack of transparency, the dual class structure (of the stock) and what is expected to be an unusually wide range of initial analyst estimates," Terry said in his report. Credit Suisse, one of the lead underwriters in the Google offering, initiated coverage on the company Tuesday with an "outperform" and placed a 12-month target on the stock price at $145.

Google traded Tuesday morning at $122.34, up $3.98 a share.

The company is expected to announce its third-quarter results the week of Oct. 18.

Source: C-Net News

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