We just had a buffet of quarterly earnings releases from some of the largest technology firms: Google Inc. (NASDAQ/GOOG); Microsoft Corporation (NASDAQ/MSFT); Intel Corporation (NASDAQ/INTC); and International Business Machines Corporation (NYSE/IBM).
Following the release, three out of the four firms’ stocks were up. Would you be surprised to learn that it was Google that disappointed investors with their quarterly earnings release? Investors have sold the stock hard; now down over $50.00, or 7.8%? Obviously, Google is an outstanding company with innovative products and a huge market lead in many sectors. What I find interesting is that, since the rise of Google, all we’ve heard is how you should replace “old” technology firms in your portfolio with the “new” high-tech firms as the prime investment strategy. This recent quarterly earnings release is a sign that even the best and brightest of new technology companies have a few lessons to learn from the old, blue-chip high-techs.
To start, Google actually had pretty good numbers in its quarterly earnings, with revenue rising 25% to $10.5 billion. The real problems are: Google’s ability to communicate with investors what the future plans will be regarding its investment strategy; how will the firm monetize some of its assets; and the European economy.
Part of the job for the executives of any organization is to let investors know what their investment strategy and guiding future expectations are with a solid business plan. While Google’s CEO Larry Page has tried to alleviate investor concerns, a drop of over seven percent immediately after the quarterly earnings release obviously shows there was a disconnect between what investors believed they knew about the firm and reality.
A large portion of Google’s revenue comes from Europe. This is an obvious concern for investors looking at the quarterly earnings. Unlike IBM, Intel and Microsoft, Google doesn’t make much money from corporations for products and services, but focuses mainly on advertising to the retail market. This entrenched customer base of corporate accounts provides a cushion in times of uncertainty, buffering quarterly earnings, especially when current corporate profits and cash levels are quite high. Companies are looking to lower costs by adding to their technological arsenal, rather than hiring more people, an investment strategy that is obviously working.
The push by Google into mobile technology is a mixed picture. Yes, “Android” enjoys a huge market share, but the ad revenue generated is less than standard PC searches, as we see lower-than-expected results in its quarterly earnings. The lack of being able to monetize on the actual installation of Android software on so many millions of mobile devices also seems to be frustrating investors, when compared to Apple Inc. (NASDAQ/AAPL), which does make money on both the software and hardware sales of its “iPhone.”
Something that always scares investors is a company that has done well, but that starts to do too much and get into areas that isn’t their specialty, usually a dangerous investment strategy. CEO Larry Page is trying to rein in such excesses and get back to the firm’s core competency, eliminating “pet” projects and attempting to focus Google on areas where the highest returns are possible. This is certainly a step in the right direction. Compare how many products and sectors Apple is in versus Google and you can see how much more focused Apple is.
Personally, I love all of these high-tech names. The interesting point: a firm like Microsoft or Intel is considered a slow growth firm compared to Google, obviously. Yet, if you held shares over the last couple years in all three, you would be essentially flat, except that in Microsoft and Intel you would’ve gotten a yield of approximately three percent between the two stocks. Had you held the shares of IBM and Apple, you would have had the stocks move up approximately 50% and 100%, respectively, over the last few years, compared to flat for Google.
The difference is that, while Google has brilliant people working for the firm coming up with great products, they need to do several things to see strong returns in its stock. Focus on what they do best and leverage it to obtain the highest return on investment. Considering their expertise on the Internet, it makes more sense for the firm to develop its “Google+” social network, with over 40 million users already compared with Facebook’s 800 million, than for the firm to develop solar projects for green energy, on which the firm has spent almost $1.0 billion with no foreseeable avenue to make any money off that at all.
Old tech still has a few things to teach the new kids on the block.