Google Investors’ Motto: Don’t Be Youthful

Investors met Google’s earnings for the first quarter with a near universal sigh of disappointment. The next sound was the dumping of Google’s shares, which fell by some 7 percent in the aftermath.

The company reported an adjusted profit of US$8.08 a share — which missed analyst expectations of $8.11 a share. Digging deeper into the numbers, a culprit was found: unusually heavy operating expenses or spending, driven in no small part by the company’s increased headcount. Google hired close to 2,000 new employees in Q1, part of a corporate strategy to increase its workforce by 6,000 in 2011.

Again, a culprit was found: It must be Larry Page! The company’s “new” CEO, Page apparently is viewed as a high-flying, high-dreaming spender, whether that’s a fair reflection of his management style or not.

Google did not respond to the E-Commerce Times’ request to comment for this story.

Still the Kid

Reading between the lines, there seems to be a lack of confidence in Page’s leadership. The seeds of this uncertainty may have been planted when Eric Schmidt, aka “the grownup,” took the company’s helm. Or they may have sprouted from some of Page’s pet projects, which seem to be straying too far away from Google’s core search business for investors’ comfort.

In short, the Street seems to be wondering whether Page — now 38 — has gained enough maturity to manage the Internet giant he cofounded.

A Look at the Numbers

Leaving aside the psychological profiling, Page does appear to be the cause of at least some of the investor discomfort, said Frederic Ruffy, the senior options strategist at WhatsTrading.com.

“Google reported quarterly earnings of $8.08 per share and that fell two cents short of analyst estimates. While that is not a big miss, the primary concern seems to be over the increase in operating expenses, which caused profit margins to come in at 37.6 percent and well below consensus estimates,” Ruffy told the E-Commerce Times.

“Operating expenses surged to $2.84 billion from $1.84 billion the year before. Higher costs for hiring, wages and marketing were largely responsible,” he noted.

There has also been a focus on Larry Page’s public statements that investing heavily in emerging technologies and new opportunities is a priority.

“The Street seems worried that this focus on growth is going to take a toll on profit margins in the quarters ahead,” Ruffy concluded.

Search Yes, Flying Cars, No!

There is something to this theory — at least when it is coupled with the recognition that Google doesn’t know its own limits.

Google is an exemplar of innovation in some areas, but in others it loses site of the proper process innovation requires, said Mark Faust, author of the book Growth or Bust! and head of Echelon Management International, pointing to the much-hyped driverless car concept.

There is no doubt the founders are creative and technically savvy, he told the E-Commerce Times — it is just that some feel they lucked into successful business models that weren’t initially their strategic choice.

Then hubris begot wild and wasteful business ventures that weren’t focused on market research or on the needs of customers — at least, that was the take of some worried investors, Faust concluded.

For his part, “I have faith that the founders have grown in wisdom and will get back to the basics,” Faust said, “while holding on to their company’s competitive advantages.”

Changing of the Guard

The current unease can, in large part, be chalked up to the change in leadership, Dave Martin, SVP of Media for Ignited, told the E-Commerce Times. “Investors are very likely worried any time there’s such a big change in leadership.”

That said, there is clearly something amiss at Google, Martin added.

“While 27 percent increase in revenue and 15 percent increase in profits in Q1 year-over-year both sound like amazing numbers, they still don’t meet the expectations of Wall Street investors,” he observed. “Google does seem to be experiencing a bit of a slump.”

Then there is the question of what Google is spending its money on — that is, social initiatives, Chrome and Android. Of these, only Android is paying off right now.

“Google is certainly in a position to take risks considering their continued dominance,” Martin concluded, “but no company can afford to spend without results forever.”