Google 2009

Analysts have finally started cutting their estimates for Google’s growth this year, but based on Google’s announcement that it is canning 100 recruiters, the current consensus is almost certainly still too high.

Wall Street expects Google’s net revenue to grow 11% this year, from $15.8 billion to $17.7 billion.  This estimate is down from about 20% expected growth only a few months ago.  Given layoffs and the speed at which the global economy is deteriorating, estimating low single-digit growth (or even no growth) would be more reasonable.

Also, now that Google’s revenue growth has slowed, bullish analysts are cheerfully suggesting that it is moving from being a "growth story" to a "margin story."  As management cuts costs, this story goes, earnings will increase and the stock will go up.  Both of these assumptions are probably wrong.

Google’s margins are already high.  If revenue growth stalls, cutting costs will not produce anything more than a temporary boost in earnings.  Google would also be dumb to make margins much higher than they already are.

Google’s current cost cuts, meanwhile, are reactive, not proactive: They are being made because revenue growth is much slower than expected. Markets don’t usually stand up and applaud this.

Lastly, transitions from "growth stories" to "margin stories" usually take years, not months.  The only way Google will hit the $500 targets bullish analysts are stubbornly maintaining is if the market as a whole recovers and it rises with the tide.  A more likely scenario, in our opinion, is that analysts keep cutting their growth estimates and eventually cut those targets to the mid-to high- $300s by the middle of the year. Of course, if the market continues to drop, GOOG could be in the low-$200s by then.

See Also:Google Announces Layoffs