NEW YORK (CNN/Money) -
Google Inc. shares tumbled early Friday as the earnings expectations game beat aside a strong profit report and a new $400 price target for the world's largest Internet search engine, about to mark its first year as a public company.
Shares in Google (down $15.53 to $298.41, Research), which hit an all-time high of $317.80 during regular trading Thursday, slid 5 percent, to about $297, the morning after the company reported that sales in the second quarter doubled and profits quadrupled.
In after-hours trading Thursday, the Mountain View, Calif.-based company's shares had tumbled to around $290 before bouncing back in Nasdaq premarket trading.
The world's largest Internet search engine and an online advertising bellwether has now exceeded analyst estimates in every quarter in its short life as a public company. And that, some analysts said, was the problem it ran into late Thursday as its stock dropped as much as eleven percent during after-hours trading.
"In each of the last three quarters, Google has substantially surpassed expectations and this quarter was a very solid quarter," said Marianne Wolk, an analyst with Susquehanna Financial Group. "But it did not exceed the highest end of the expectation range."
Scott Kessler, an analyst with Standard & Poor's, agreed. "That's a substantial beat when it comes to the second quarter, but the expectations were just way, way too high," he said.
Prudential Equity Group used the drop in stock price to urge clients Friday to buy Google, as it raised its price target for the company's shares to $400 -- the highest price target for Google shares on Wall Street.
Other investment banks raised their targets too. First Albany set a goal of $363 for Google shares. Citigroup's Smith Barney unit set a $360 price target and three other investment banks said they are looking for a rise to $350.
Standard & Poor's was more cautious. Kessler raised his Google price mark to $327 on Friday, but has a "hold" rating on the stock.
Google has been a Wall Street darling since its August 2004 initial public offering. Its shares have since surged more than 270 percent on the notion that the company will be the primary beneficiary of the resurgent online advertising market, led by the "sponsored search" category that Google dominates. But the meteoric run-up in Google shares has created concern that the price is too high.
Meanwhile, shares in arch rival Yahoo! are down 16 percent since Google went public, despite evidence that it too is profiting nicely from the Internet ad boom.
And while Google shares are up more than 60 percent year-to-date, shares in Yahoo Yahoo! (up $0.46 to $33.40, Research) and other key online players like retailer Amazon (down $0.24 to $37.71, Research) and auction powerhouse eBay (down $0.90 to $41.20, Research) are down in 2005.
Paying close attention to sales
Except for warning about the seasonally slow summer, Google delivered a strong financial report late Thursday.
Investors were quick to zero in on Google's sales after rival Yahoo! missed revenue forecasts when it reported second-quarter earnings late Tuesday. Yahoo! shares fell sharply as a result.
Google said that revenues for the quarter that ended in June came to $890 million, not counting the fees known as traffic acquisition costs (TAC) that Google shares with its advertising partners. While that number soundly beat Thomson First Call estimates of $842 million, some buy-side traders had predicted the results would approach $900 million, according to David Edwards of American Technology Research.
"The whisper number had gotten far ahead of the consensus and had increased over the last week or two," continued Edwards. Investors, he said, were not as focused on earnings per share, which some analysts estimated came to about $1.36 per share. The earnings of $1.19 per share that Google reported included a stock option charge.
In the first quarter of 2005, Google reported earnings per share that were 40 percent, or 37 cents, higher than the analysts' consensus. This time, however, the company beat estimates by 12 percent, or 15 cents a share.
"The magnitude of the beat is a lot less," said Kessler.
A word of caution from Google
That Google scored a double instead of a home run was not the only reason investors frowned at the results.
Google does not give guidance. But company officials warned during a conference with analysts after the results were announced that the current quarter that ends in September, typically the slowest of the year, may not match last summer's blowout quarter.
George Reyes, Google's chief financial officer, said the year-ago third quarter was "unusually strong" due to sales generated by the attention surrounding the company's initial public offering as well as certain improvements to its advertising service.
Reyes noted that the summer months tend to be slow for Internet businesses as consumers go on vacation and generally spend more time outdoors and away from their computers. That's especially the case in European markets, which essentially close for business during the month of August and which are becoming a bigger piece of Google's business.
"I encourage you to factor in what you know about both domestic and European summertime seasonality," Reyes told analysts. Google does not give a lot of detail about its domestic versus and foreign operations, other than to report that overseas markets generate 39 percent of revenue.
On average, analysts are expecting revenues of $892 million in the third quarter, up 77 percent from the prior year. Earnings per share are estimated to grow 78 percent year over year, to $1.25.
David Edwards, the American Technology Research analyst, said the unmet expectations for the second quarter combined with Google's current-quarter caution triggered the sell-off late Thursday.
"(That's) not as bullish of an outlook" to keep investors happy, said Edwards.
To read about Microsoft's mixed messages,click here.
Analysts quoted in this story do no own shares of Google and their firms do not have any investment banking relationship with the company.