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March 23, 2006

Will Google Earn $1.99 Per Share in Q1 2006?

posted by MR WAVETHEORY at 3/23/2006 01:20:00 PM
Most analysts are estimating Google will earn $1.99 per share in Q1 2006. I was curious to see if it was reasonable so I looked at their earnings history.

Earnings History Mar-05 Jun-05 Sep-05 Dec-05
EPS Est 0.92 1.21 1.36 1.76
EPS Actual 1.29 1.36 1.51 1.54
Difference 0.37 0.15 0.15 -0.22
Surprise % 40.2% 12.4% 11.0% -12.5%

Google earned $1.54 per share in Q4. In order to earn $1.99, it needs to add 45 cents sequentially to the bottom line. Has Google historically been able to achieve this type of growth in EPS?

Below, I calculated the sequential EPS increase from quarter to quarter.

Q2 = +7 cents from Q1
Q3 = +15 cents from Q2
Q4 = + 3 cents from Q3

In the past 3 quarters, Google has never added more than 15 cents sequentially to its EPS.

To assume a 45 cent increase seems like wishful thinking. Is it possible? Sure. But going by the numbers, t
hey've never added 45 cents sequentially to the bottom line from one quarter to the next. Also, look at the amount by which Google has surprised the Street and you see a trend developing. The amount Google has surprised the Street by was 40.2% in Q1. It proceeded to decline sequentially to 12.4% in Q2, 11.0% in Q3, and -12.5% in Q4. Do you see a trend?

EPS is suffering from poor expense control, high levels of hiring to fight Microsoft, and dilution from stock options exercise

I think the lack of EPS growth has to do several factors including poor expense control, high levels of hiring, and all the stock options management exercises - none of which appear to be slowing down. Take stock options. It is not rare to see around 250,000 shares of insider shares being sold any given day. That annualizes to 60 million shares in a year or $18 billion of stock. If you round the numbers, that implies 18% dilution. Or take the hiring that is happening which is necessary because of the threat from Microsoft. Or finally, the lack of expense control or financial control which really reared its head in Q4.

Judging from these factors, my conclusion is that it will be difficult for Google to meet its EPS target.

Love the product. Dump the stock.

Mr Wave Theory

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Anonymous hil said...

Well that all sounded great until about 5:30!

They're still going to miss earnings and I can't wait to short it but now we have a new ballgame.

As near as I can figure it, Google will be 1% of the S&P which will force $1T in funds to put $10Bn into the stock between now and next Friday (or do they have to wait until Friday?).

We can assume that Funds and insiders won't be selling so that means 100M retail shares so 1/3 of those need to be taken out of circulation.

I'm thinking conservative 15% boost but we have to remember what happened to Yahoo when they were added (up 60%) and they had a lot more float...

Let me know what you think.

- Phil

9:18 AM  
Anonymous rohan_888 said...

Hi Mr WT,

Thanks for the well balanced posting!

I looked myself at the nett (GAAP) quarterly earnings in m USD:

2004: 64, 79, 52, 204
2005: 369, 343, 381, 372

Every quarter result they compared to the same quarter the year before (not a bad way to do if there is a seasonal effect), and indeed, the increase is huge. But the increase compared to the quarter before during 2005 is ....... about zippo!

Add to this that the equity has been rising fast due to the share placement (5 billion extra money), which means that the return on equity is not that impressive (I guess about 20-25%, not bad at all, but not deserving the crazy high current (2005) PE of about 70).

Regarding stock options, I read that the way they account for them is that they spread the cost over 4 years. Say the actual cost in year 2004 is A, in 2005 B and in 2006 C.

Cost in 2004: 0.25*A
Cost in 2005: 0.25*A + 0.25*B
Cost in 2006: 0.25*A + 0.25*B + 0.25*C

That would explain why the cost is rising so fast. Extra to that quickly increasing wages plus high capital expenditure and cost of the lawsuit they lost regarding the click fraud. So I agree with you, it would be a tall order to make the 570m nett (GAAP) profit Wall Street expects for the 1st quarter.

9:19 AM  
Anonymous market participant said...

Live by the puff, die by the puff. The biggest thing that is going to affect GOOG's EPS is the crazy stock dilution, especially when all those Google Stock Units mature.

If shares outstanding grows by 16% year, and earnings are expected to grow 35%. GOOG just can't help but miss earnings, even with otherwise outstanding earnings. All it takes, are one or two good negative earnings surprises to knock the air out real quick.

Starmine's the predicted earnings for this year are $8.84 and for next year (2007) there is predicted negative surprise between Starmine's "SmartEstimate" of 11.69 and the consensus @ 11.91.

GOOG's quality of earnings is a bit funky as there is a huge disconnect between cash flow from operations and net income. It's fairly bizarre to register CFO of $2,459, on net income of $372.2 as happened in the most recent quarter.

9:19 AM  
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