The financial press has plenty of faults, but it also wields incredible power. A single negative story can cost a corporation billions, and a journalist’s armchair analysis can cause wild swings in a company’s stock. Increasingly, reporters who cover the markets don’t just write the news; they are the news.
Case in point is this week’s highly speculative Barron’s cover story, which sets out to prove that Google, heretofore the darling of investors and analysts everywhere, is not only mortal but probably facing “a lot more tumbling ahead.” Writer Jacqueline Doherty weighs the evidence and rules that the “share price could well be cut in half over the next year as the Internet giant grapples with growing competition from Microsoft and Yahoo!, increased pricing pressures in its online ad sales and mounting concern about what’s known as click fraud.”
Actually, the biggest threat to Google’s stock price right now is Barron’s. Doherty’s article injected a lot of fright into the market, and by the end of Monday, the company’s stock price had dropped 4.7 percent, to $345.70. Voila, nearly five billion dollars down the drain.
Clearly, journalists who cover the markets bear an enormous responsibility. The effect of a negative story is extreme and immediate; there is no room for “provocative” arguments aimed primarily at encouraging further discussion. Stories must be ironclad, unambiguous and backed up with reams of persuasive evidence and impeccable analysis. If outside sources have influenced an analysis, their financial interests must be stated explicitly, so that readers can judge the information accordingly.
The Barron’s story does none of these things. As far as readers can ascertain from Doherty’s article, Google has just shed five billion dollars of its market value because … well, because Jacqueline Doherty wanted it to.
“[T]he list of challenges the company faces is nothing short of mind-googling,” Doherty writes. She goes on to note that the Internet giant faces a challenge from Microsoft, possible altercations with phone and cable firms, and “brawls with content providers like newspaper and book publishers … Google’s cost structure, meanwhile, is ballooning, with the company hiring thousands of new workers and mulling projects as far afield as space travel. If Google trips on even a few of the challenges, its earnings could easily disappoint.”
And what is the likelihood that Google will, in fact, trip on a few of the challenges? Who says so? And how, precisely, is this different from the past year, during which Google’s stock price registered large gains?
Doherty leaves these questions mostly unanswered. Instead, the crux of her argument is a “less than scientific” (read: “essentially arbitrary”) crystal-ball exercise:
To get a sense of what might happen to the stock, we gave one über-bull’s 2006 revenue estimate for Google a 20 percent haircut, trimmed his projected expenses by 5 percent (but no further, because bulls greatly underestimate Google’s costs), deducted stock-based compensation and, generously, gave the company credit for the considerable interest income on its cash. The result: Earnings would be 30 percent lower than the bull’s projection, at $6.28 a share. If the stock were to maintain its current multiple of 41 on those lowered earnings, it would be worth $257. It’s more likely the multiple would shrink to as low as 30, in line with the slower growth. That would make the stock worth $188, versus its recent $360.
Doherty does not identify this “über-bull.” Nor does she let us know what this analyst might say about a journalist who lops a full 20 percent off his revenue projections just for the hell of it. The fact is, Barron’s simply has no business engaging in this sort of gobbledygook.
As UBS analyst Benjamin Schachter told clients in a note Monday, “[A]side from rehashing many well-known risks, Barron’s makes noise with a back-of-the-envelope valuation that if revenue estimates are 20 percent too high and costs 5 percent too high, the stock would be lower … That’s the case with any high-growth company.”
Indeed, the problem with Google (whose stock zoomed from $85 at its debut in August 2004 to a high of $475 on Jan. 11 before dropping off recently) is that it has performed so exceedingly well in its short history as a public company that it cannot now possibly meet the ridiculous expectations of analysts or members of the media. (A few weeks ago, Google reported fourth-quarter earnings of $372 million, up 82 percent from the year before — and its stock still fell 12 percent for the day.)
Apparently unsatisfied with this performance (or perhaps merely wishing to demonstrate that Barron’s can beat up on the king of the playground), Doherty finds a few analysts among thousands who are willing to bolster her arguments. Casting a wide net, she notes that one is Henry Blodget, the “scorned Wall Street analyst” who once famously predicted Amazon’s stock would more than double to $400, but has now (having learned his lesson) written on his Web site that Google’s stock “could crumble to $100.”
Another is Fred Hickey, editor of the High-Tech Strategist newsletter and “a member of the Barron’s Roundtable.” We are not told anything about the calculations and analysis that went into his prediction. In fact, all we are told about Hickey is that he says, “Google reminds me very much of what went on in 1999 and 2000 … The valuation is insane, relative to what they do.”
The fact is, Hickey is a notorious über-bear. His contrariness makes good copy, but is there any other reason why Barron’s values his opinion over others? What does the rest of the Roundtable think? What is a Barron’s Roundtable, anyway? Is Doherty’s analysis really her own? If so, why the gratuitous quotations?
On the other side of the silly spectrum, the one bullish observer Barron’s includes in its story believes “Google’s revenues could grow to a cool $100 billion, which would justify a long-term target of $2,000 on the shares.” In other words, the magazine implies, people who are optimistic about Google’s future are a little nutty.
That’s funny, because most of the rest of the world doesn’t think so — and the Barron’s article itself has a lot of evidence showing just how rosy the company’s fundamental financials are. Over the past two years, notes Barron’s, Google’s “[n]et revenues have increased more than 300 percent and operating earnings have soared 750 percent.” The company earned $5.70 a share last year, and analysts polled by Thomson Financial expect that number to grow to $8.85 in 2006 and $12.06 in 2007. According to Nielsen/NetRatings, the number of Google Internet searches (the company’s core business) shot up 55 percent last year, and Google has $8 billion of cash on hand to further its expansion dreams.
That sounds pretty darn good to us. Like every company, Google has to plan its future carefully. So maybe Barron’s is right that the company will face increased competition. And perhaps it will have to slow down spending, though with $8 billion cash on hand, the company is hardly at risk of going broke — and, believe it or not, R&D has been proven to contribute to profitable growth.
We suspect that the people at Barron’s know that Google is in good health. But they seem to think that revenues and profits are beside the point. All that really matters is the share price. Why? Perhaps because the viewership of cartoonish talk shows like CNBC’s Mad Money prove that senseless ravings about stock performance — today, this hour, tomorrow morning — is entertaining and profitable.
But the time has come to recognize these stock-price snapshot “journalists” for what they are: financial paparazzi. Their stories get attention — they fuel passions, cause embarrassment, and spark sheepish excuses. They make an impact. But do they make a positive impact? Do they aspire to truth?
Google is a healthy company. It is growing and it is phenomenally profitable. This is an iron fact. It is undebatable. It is truth. And it should have been Barron’s story.