Google’s warning triggers US sell-off

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A blunt warning on Tuesday from Google’s chief financial officer that its “growth will slow” triggered a sharp drop in the shares and a wider sell-off in the US.

Shares in the internet’s dominant search engine fell more than 13 per cent in morning trading on Tuesday, although they staged an afternoon recovery, and were down by 7 per cent by the close. The shares opened little changed at about $363 on Wednesday.

That also helped bring down the broader market, with the technology-heavy Nasdaq Composite index closing down 26.20 points, or 1.14 per cent, while the Dow Jones Industrial Average ended 0.94 per cent lower, and fell through the 11,000 barrier once more, to close at 10,993.33.

“Growth is slowing and now largely organic; the search monetisation gains have now largely been realised,” George Reyes, Google’s chief financial officer told a Merrill Lynch conference in New York, prompting a sudden slide in the company’s stock.

Some analysts described the remarks as unsurprising and the market reaction as too severe, but said there was concern Google was too dependent on its advertising revenues for growth.

Mr Reyes said: “At the end of the day, growth will slow. Will it be precipitous? I doubt it... I’m not turning bearish at all. I think we’ve got a lot of growth ahead of us...the question is...at what rates?”

He said Google was falling victim to the “law of large numbers”, an apparent reference to the lower percentage growth possible as revenues increase.

Its sales grew 97 per cent from a year before to $1.29bn in the last quarter, but this compared with a 109 per cent growth rate in the previous three months.

Mr Reyes added that tweaking the advertising system and its presentation of adverts in search engine results had realised most of the possible gains and growth was now largely organic. “Each and every quarter, we’re going to have to find new ways to monetise the business,” he said.

Google later issued a statement “clarifying” the remarks, saying that as it had stated before “monetization improvements will continue to be a key factor in driving future revenue growth. We still see significant opportunities to improve monetization and intend to continue to focus our efforts in this area”.

Wall Street’s nervous response to the remarks could be attributed at least in part to the giddy heights Google’s share price had reached on the back of search advertising, which contributes 99 per cent of revenues.

Google’s share price has long been volatile,. The fall did not match its record one-day drop on January 20, when the stock closed 8.47 per cent lower after a legal tussle with the US Justice Department. It also remained above its level of two weeks ago.

Marc Pado, chief market strategist at Cantor Fitzgerald, said portfolio managers had been looking to protect their monthly performance numbers on the last day of the month.

“Had this been the middle of the month, I don’t think the market would be down as much because investors would not be locking in on profit to compensate for Google’s drop,” he said.

Several internet analysts suggested there was little new news. Bank of America Securities and Oppenheimer both announced they were leaving price and earnings estimates unchanged.

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