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Three reasons not to hold Google shares

By John Shinal
Jan 20, 2012 15:29:51 (ET)

SAN FRANCISCO (MarketWatch) -- Wall Street appears to believe that an 8% sell-off on Google Inc. on Friday in the wake of its disappointing earnings report presents a good window for investors to get into the stock.

But for those of you looking at Google's drop as a buying opportunity, here are three things to keep in mind:

1. The company's operating expenses are going to rise significantly once it acquires Motorola Mobility Holdings and its 20,000 or so workers. And that's on top of the higher expenses Google already faces after adding more than 8,000 workers itself in 2011. This expanding payroll is one of the main reasons why the stock will likely face headwinds until the pending Motorola deal is closed and Google's new operating model becomes clear.

When chief financial officer Patrick Pichette listed the reasons for the company's 30 percent fourth-quarter increase in operating expenses on Google's earnings call Thursday afternoon, the first one he mentioned was "payroll," and with good reason.

The company added 1,100 workers during the quarter, Pichette said. While that was less than the 2,585 it added in the third quarter, Google ended the year with 32,500 employees, a third more than it had at the end of 2010.

Employee expenses are a big part of why Google's quarterly net income rose just 6.7 percent, and operating income 17.8 percent, even though gross revenue rose 25 percent.

Pichette repeated yesterday that Google is going to operate Motorola Mobility as a separate unit and report its results separately. Yet that doesn't change the fact that Google is paying $12.5 billion for a huge company that reported a net loss in the third quarter.

It's unclear exactly what Google's new, consolidated operating model is going to look like once Motorola Mobility's results become part of its bottom line.

But consider this: On the call yesterday, when commenting on the company's slower hiring rate in the fourth quarter, CEO Larry Page called the company's third-quarter hiring rate "the edge of what's manageable." Again, it added 2,585 workers during that period. Once it acquires Motorola Mobility, it will ultimately be responsible for paying salary and benefits to another 20,000 workers. How manageable is that going to be?

2. Google is not really a public company.

Google's initial public offering in August, 2005, was public in name only, as the company helped pioneer the now-common practice of young tech companies selling only a small fraction of their outstanding shares. Up until then, tech investment bankers would usually sell somewhere between 15 percent and 20 percent in an initial stock sale.

Google initially planned to sell a little more than 10 percent of its shares, but tepid demand for the IPO forced the company to cut the size of the offering. In the end, it sold about 8 percent of its shares outstanding at the time.

Yet even parting with that little equity was too much for Google's top management and venture capital investors. To ensure that they would never have to succumb to pressure from outside shareholders, the company issued a separate class of shares which guarantee that co-founders Page and Sergey Brin and other insiders will always have firm control of company voting rights. This dual-class structure is a big reason why Google has always gotten very poor grades from corporate governance advocates.

The fact that the company isn't accountable to outside shareholders is important, because...

3. Larry Page seems to not care much about investors

I have no doubt that Page cares deeply about Google users. Listening to him on the Google earnings call, it's clear that he wants the company focused like a laser on developing products that are first-rate, ones that will make them want to use Google's services on a daily basis.

For those who represented investors' interests on the call, however, Page had little love. Near the end of the call, his impatience with repeated analyst questions about the company's cost-per-click number, which is a key metric for judging the health of its core search business, was evident. Page simply announced that he would prefer to take questions about some other topic.

Long-time readers of this column know I have little admiration for Wall Street equity analysts, whose reports are rife with conflicts of interest and selective disclosure. When Page and Brin said in their initial S-1 filing in 2005 that they wouldn't provide financial forecasts, I privately cheered.

And as a fellow human being, I salute Page's desire to have Google "make an impact on the planet," as he said Thursday.

But since I'm paid to look out for the interests of tech investors, it's my job to say that Page's comments made him sound like a man who thought he was doing Wall Street a favor simply by being on the call. If so, he may want to turn the call over to someone willing to answer whatever questions analysts think are important to investors.

That attitude prompts a question that all potential Google investors should ask themselves: why put your hard-earned money into a company whose leader who appears to spend no time worrying about your financial interest in it?

Google Shares Plunge As Earnings Report Raises Growth Concerns

11:05 AM ET 1/20/12 | Dow Jones
By Matt Jarzemsky ， Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--Google Inc.'s (GOOG) stock tumbled 8% Friday after a disappointing fourth-quarter report raised concerns that the search giant's revenue growth is slowing.

The weaker-than-expected results were hurt by Europe's economic woes as well as mobile and other new forms of online advertising selling for lower prices than Google's traditional ads. The issues come as Google continues its costly expansion beyond its core search-advertising business, which pits it against formidable competition in mobile, social networking and online video.

Google shares fell 8% to $588.46 late Friday morning, off a three-month low of $584.81.

"We maintain a cautious view as European weakness likely persists and the U.S. appears off to a slow start," Benchmark Co. analyst Clayton Moran wrote in a note to clients. "Competition between the largest Internet portals and search providers has increased as Internet advertising has grown tremendously."

Late Thursday, Google reported fourth-quarter earnings of $9.50 a share, on an adjusted basis, falling short of the $10.49 a share average estimate of analysts in a Thomson Reuters poll.

One surprise was an 8% drop in the average amount an advertiser paid for someone clicking on an ad. The company attributed the decline to faster growth in relatively low-revenue types of ads such as those placed on mobile devices and others from emerging markets. But the decrease raised questions about how newer forms of ads will affect the company's business.

Google's international growth rate--excluding the U.K.--slowed, and the company cited Germany as a weak spot. Foreign-exchange impacts also weighed on the results.

Many analysts on Friday said they were unperturbed by the results and noted positive aspects of the report. For example, paid click volume--a measure of how frequently consumers click on ads distributed by Google--jumped 34%.

"Despite the slowdown in search, we remind investors that paid click volume is showing its fastest acceleration in years, display and mobile traction growth is continuing," Evercore Partners analyst Ken Sena said in a note.

Sena added that Google "seems to be correctly focusing on fewer, more promising franchises."

Google has sought to expand its business as it faces the risk that changing consumer behavior could make search less relevant in the future.

The company has pushed into social media, launching Google+ as an alternative to Facebook's popular website. Google has also been repositioning its YouTube site as a destination for professionally produced content, as Internet video providers such as Netflix Inc. (NFLX) as well as traditional media companies such as cable distributor Comcast Corp. (CMCSA, CMCSK) are also seeking to capture online viewers' eyes.

In addition, last year Google agreed to buy Motorola Mobility Holdings Inc. (MMI) for about $12.5 billion, diving into the mobile-handset space and beefing up its patent trove as its Android mobile operating system faces attacks from rivals.

Microsoft Corp. (MSFT) took aim at Google's Web-based software for word processing and business functions last year, releasing a cloud-based version of its popular Office applications.

Google reported its operating expenses rose to 32% of revenue in the fourth quarter, up from 30% a year earlier. Meanwhile, the company's capital expenditures totaled $951 million during the period, its highest of the year. The majority of that spending was related to information-technology infrastructure investments, including data centers, servers, and networking equipment.

Google said it hired more than 8,000 new employees in 2011. Last January, the company said 2011 would likely be a record hiring year, topping the 6,000 new hires added in 2007.

Google Chief Financial Officer Patrick Pichette said during a conference call to discuss earnings that the results capped a year of "disciplined" investing alongside "strong growth and actually great operational and financial performance."