As if we needed any more convincing, BusinessWeek provided yet more evidence yesterday that the media's obsession with short-term stock prices does not make any sense.
In its self-consciously pithy roundup, "The Business Week," the magazine congratulated Hewlett-Packard ("HP Wows The Street") for its quick turnaround in the year since CEO Mark Hurd took over for Carly Fiorina. "Crisp restructuring and smoother operations helped HP blow past Street expectations for its first quarter, posting 30 percent brawnier profits," BusinessWeek wrote. "Hurd has also nabbed new talent and has segments such as laptops and photo printing gear steaming. The stock jumped nearly 4 percent in after-hours trading on Feb. 15."
So HP is the new comeback kid, a mature and previously lumbering company that is again seeing solid results. Fine.
We would have no problem with this (aside from the silly use of "brawnier" instead of "higher"), except that in another item BusinessWeek made it clear that it believes the actual health of a company is irrelevant. All that matters is the stock price.
Under the headline "Google's Swoon," BusinessWeek informed us that "Bulging bank accounts in Silicon Valley look a mite slimmer because of sinking Google shares. After a torrid 2005, in which the search titan more than doubled to a peak of [$]475 on Jan. 11, the stock has plunged 28 percent, closing at [$]342 on Feb. 15. Investors changed their minds after weak fourth-quarter numbers made them look closely at Google's dependence on search."
What BusinessWeek conveniently did not disclose (besides that Barron's earlier hatchet job was responsible for a significant portion of Google's plunge earlier this week) is that those fourth-quarter numbers included (subscription required) earnings of $372 million, up 82 percent from the year before, and revenues of $1.92 billion, up 86 percent. What, exactly, makes those numbers "weak"?
Why is one company's 82 percent increase in profits weak, while another company's 30 percent increase is "brawny"?
Here's our answer: Because in BusinessWeek's lower-Manhattan-centric worldview, Wall Street expectations are the name of the game. And the short-term traders seem, at the moment, to want Google to pick gold off trees, while they are grateful that HP is merely showing signs of life.
We don't mean to be a Google cheerleader -- a new piece on TheStreet.com arguing that Google is betraying its ideals, for example, makes some persuasive points. But instead of getting caught up in the expectations game, the press ought to be reporting that Google is a healthy, growing, and hugely profitable company.
That, after all, is the truth. You know, that thing we get paid to look for?
No question BusinessWeek is guilty of obnoxious writing, but the main thrust of this column seems to be that (1) those two growth numbers should be treated consistently, and (2) the fact that they weren't has something to do with "wall street expectations" and a short-term vs. long-term outlook. I think both these points are false.
First, a company's growth (over any time frame) should be measured against the secular growth for its entire industry and the company's current size and level of maturity. You wouldn't expect HP to grow sales at the same rate as Google because overall spending on new computers and printers isn't growing as fast as overall spending on internet advertising, and also because HP is an older, more mature company with much higher current revenues, and it's harder to grow off a larger base.
So it's completely plausible that sales growth from one company would be disappointing even if a lower number from another company is seen as a positive. This would be true even if there were no short-term investors, no research analysts, no Businessweek, even if there were no stock market.
After reading and commenting on Mr. Colby's ridiculous article on Google, I decided to give him one more chance by reading this article. Unfortunately, this article also demonstrates Mr. Colby's unbelievable lack of understanding of the financial markets. Stock prices reflect investors' expectations of future earnings. To the extent expectations meet or exceed those expectations stock prices rise or fall. Even though Google's earnings rose 82% year over year, if investors expected earnings to grow more than that, then we should reasonably expect the stock to decline. Why is that so difficult for the author to comprehend? I would suggest that Mr. Colby audit a Columbia Business School class. Perhaps that would help.