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A sudden chill fell on Google's red-hot share price on Tuesday as the stock market's latest internet darling unveiled earnings that for the first time failed to far exceed Wall Street expectations.
The search engine company's shares slumped by more than 16 per cent in after-hours trading, wiping more than $20bn from its stock market value.
Despite the sense of disappointment on Wall Street, Google still met most analysts' official forecasts for revenues and pre-tax earnings in the final quarter of last year. However, with investors accustomed to the company blowing away such predictions, the latest results represented the first big earnings disappointment that the company has issued. In its previous five quarterly earnings reports as a public company, Google's revenues beat estimates by between 6-15 per cent.
Google executives also indicated that the company faced big expenses in the future as it continues to spend heavily to build its technology base and expand internationally in a race to take advantage of big new internet advertising markets that are emerging.
"This is a distribution scale business of massive proportions," said Eric Schmidt, chief executive officer. "We're not yet finished getting all the information in Google into the hands of users around the world," a task that would take significant extra investment, he added.
Wall Street's disappointment came despite further signs that Google is taking market share in the fast-growing search-related advertising market away from its closet rival, Yahoo. Leaving aside the commissions it pays to other websites that carry its search results, Google's revenues jumped 97 per cent from a year before, to $1.29bn, though that represented a slowdown from the 109 per cent growth rate of the preceding three months.
Costs rose faster than many analysts had expected as the company spent heavily on expansion. "We've made it very clear we're focused on growing our business, and international growth in particular," said George Reyes, chief financial officer.
Google has broken with Wall Street tradition since it went public by refusing to issue predictions of what its quarterly earnings are likely to be, arguing that this sort guidance encourages companies to take a short-term approach to managing their businesses. It has also warned that its focus on long-term growth could lead to volatile earnings in the short term.
For the final three months of last year, Google reported earnings per share, on the pro-forma basis on which Wall Street judges the company, of $1.54, below the $1.76 that the stock market had expected. The company said that its tax rate had jumped because the proportion of expenses allocated to its international operations was higher than it had expected, accounting for most of the apparent earnings shortfall. Net income for the period rose 82 per cent to $204m, or $1.22 per share.