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Google Stock Falls Hard Following Slow Growth Announcement

Google Warning on Growth
Unnerves Investors

Goog Stock Plunges Some 13%, Ending Down 7.1%

The Easy Stuff May Be Over
a recap from the Wall Street Journal

Google Inc.'s chief financial officer spooked investors with a warning that the Web-search company's growth rate would slow from its breakneck pace, sending Google shares down almost immediately.

Speaking at a Merrill Lynch & Co. investor conference, Google finance chief George Reyes said that Google is "getting to a point where the law of large numbers starts to take root," referring to the challenge of increasing revenue and profits at the same rate from higher base levels. "At the end of the day, growth will slow," he added. "Will it be precipitous? I doubt it."

Google shares plunged to $338.51 from $397.54 following his comments, as investors and analysts scrambled to figure out how serious Mr. Reyes's warning was. The shares later recovered partially, as some issued research notes saying that Google's sharp selloff was unwarranted, given that Google executives in the past had made similar warnings: that growth will eventually slow and profit margins eventually contract.

Google shares closed down $27.76, or 7.1%, at $362.62 for the day. At that level, they were 24% below than their intraday high of $475.11 hit on Jan. 11. The volume of 38.9 million shares traded yesterday made it the second-most-active day for Google since the company went public in August 2004.

But, for some investors who remained jittery from Google's fourth-quarter earnings shortfall announced on Jan. 31, Mr. Reyes's comments could be taken as the latest sign that Google is finished with the easy stuff. Some believe that the company has entered a new era, where factors such as tax rates, international operations and expenses can weigh more on short-term results than they have in the past. Such factors helped depress fourth-quarter earnings. Google's blowout growth -- its revenue rose 118% in 2004 from the previous year, for example -- has in the past largely masked any such concerns.

Speaking yesterday, Mr. Reyes said that the Mountain View, Calif., company had achieved most of the possible gains from a recent initiative to increase the revenue it generates for each consumer search. "We're going to have to find other ways to monetize our business," he said.

Mr. Reyes said future gains would come from "organic" growth, including by increasing the number of search queries Google handles. He cited Internet services that consumers can access from mobile phones and search services providing results linked to specific geographic locations as also having particularly strong potential. Google also has been pushing its toolbar software as a way to increase usage of its search services.

"I'm not turning bearish at all. I think we have a lot of growth ahead of us," Mr. Reyes said. "The question is, at what rate?" In response to a question, he said his comments weren't prompted by any specific observation about Google's business during the current quarter.

Analysts largely shrugged off Mr. Reyes's warnings. Piper Jaffray & Co. Internet analyst Safa Rashtchy in a research note said the share selloff represented a buying opportunity, saying Mr. Reyes's comments didn't suggest any faster or slower growth than Mr. Rashtchy already forecast. Piper Jaffray has received compensation for investment-banking services or has had a client relationship with Google in the past year and makes a market in Google shares.

Analyst David Garrity at Investec Inc. said in a note that Mr. Reyes "is not distinguishing his tenure through building investor confidence with well-timed statements," but also noted that the selloff possibly presented investors with a good opportunity to buy shares.

Many analysts and investors hope Google will provide more clarity during its annual analysts' day tomorrow. The company has been reluctant to provide specific financial guidance, but the recent earnings shortfall -- which Google blamed on complex tax considerations -- has increased analysts' demands for more details about its prospects.