Internet search engine giant Google (GOOG) shares rebounded smartly after the shocking fourth quarter earnings results plummeted its shares. The stock got the beating that it would not have expected in the extended hours of trading on January 19 and 20th when the market opened. But the stock has rebounded very well now to recover most of the losses.
Look at the stock performance. On January 19, Google shares closed at $639.57. This was $3.39 or 0.5 percent lower than 52-week high of $642.96. The company announced its four quarter results on January 19 after the market closed. Since the company's results failed to meet analysts' estimations, the stock opened lower by $49.04 or 7.67 percent on January 20 when the market opened. The stock further went down during the day by $53.58 to settle at $585.99.
As if this was not enough, the stock nosedived to $564.55 on January 26, i.e. a good $75.02 or 11.73 percent from the pre-earnings announcement level.
Till now, investors reaction was understandable because the earnings missed by a wide margin and that played a spoilsport in leaving the sentiments shattered. This is also because Google always refrain from giving any outlook right from the beginning. So the question of providing any positive outlook during the conference call does not arise.
Yet, the stock started seeing uptick from January 30 when the market opened. The stock opened at $578.05 and closed the week at $596.33. From then on, shares of Google are again on the upward trajectory.
During this period, there was hardly any news flow from the company to suggest any significant upward trajectory to move closer to pre-earnings announcement level. It was also interesting to see that no analyst and no brokerage downgraded the stock during this period, but reduced their EPS estimations after the fourth quarter results. Based on company's fourth quarter results, some of the brokerages have announced EPS revision.
Robert W Baird lowered FY12 EPS estimate to $43.27 from $44.23. Similarly, RBC Capital Markets reduced its 2012 revenue estimate for Google to $35.1 billion from $35.8 billion. The same brokerage also cut its EPS estimate to $41.94 from $43.14. But analyst Ross Sandler maintained his Outperform rating and price target of $800. The brokerage does not see any change in its long-term bullish view and termed the 10 percent sell-off after the results were announced was somewhat overblown.
Similarly, Barclays Capital reiterated Overweight rating and believed that the sell-off represented buying opportunities as the underlying growth prospects are in tact. Goldman Sachs viewed that the Street is underestimating Google's business model and believes that the company's efforts in mobile and display would grow rapidly to yield better results.
The important aspect is that no broker suggested selling the stock despite the company's earnings falling short of expectations. Wells Fargo downgraded the shares before the company's earnings announcement. But after the earnings results were announced, the brokerage felt that shares were fairly placed.
Significantly, Citigroup's analyst Mark Mahaney, Bank of America Merrill Lynch's Justin Post and Credit Suisse's Spencer Wang have accorded five star rating on the company's stock for EPS accuracy for the trailing two fiscal years and four quarters.
Interestingly, Google has begun operation on January 15 for a next generation personal communication device that would work on home WiFi networks. This is also few days before the announcement of its fourth quarter numbers.
Therefore, it can be safely regarded the reaction to results were just that panic and knee-jerk and on top of it margin call that dragged down the stock more than what could have happened.
The lower level of stock on the heels of results would have provided an opportunity to enter the counter. Still, the company is fundamentally strong and is planning to launch a cloud based service. The desire to extend its operations and generate more revenues is the strong points of the management.
The analysts' price target varies from a low of $400 to a high of $825, with the mean price target of $702.03 and the median target of $724.00. There is still opportunity for the stock to move upward barring any economic reversal. The stock closed February 10 trading at $605.91, still $33.66 points or 5.4 percent short of pre-earnings announcement level of $639.57. The company's 82 percent of shares is held by institutions and mutual fund owners. There is about 1381 institutional holding Google stock.