Google’s shares plunge after earnings miss

Even so, the company’s sales growth slowed in the fourth quarter, a development that is expected to continue as Google matures. Excluding ad commissions, Google’s fourth-quarter revenue rose by 23 percent from the third quarter. In 2004, Google’s fourth-quarter revenue increased by 30 percent from the third quarter.

CEO Eric Schmidt told analysts during a Tuesday conference call that the fourth-quarter results topped the company’s internal projections. “We are very pleased with the performance on every level,” he said.

Google’s management has steadfastly refused to publicly project its earning potential, making it difficult for analysts to reach the calculations that investors use to appraise a company’s value. Google also has promised to spend heavily to improve its long-term competitive position even if those investments diminish its short-term profits.

The company isn’t about to change its philosophy, Chief Financial Officer George Reyes said in a Tuesday interview.

“This is a great business with a lot of headroom,” he said. “It’s unfortunate that this happened, but this is about the long term. We are not going to do anything stupid.”

The company would have matched the average analyst estimate if not for a much higher tax rate during the fourth quarter, Reyes said.

Google’s effective tax rate in the fourth quarter was nearly 42 percent, well above the roughly 30 percent rate during the second and third quarters. The company got stuck with the higher bill because of abnormally high international expenses that shifted income to the United States and its higher tax rate, Reyes said. Google expects its 2006 tax rate to be about 30 percent.

No matter how the fourth-quarter results are dissected, the earnings represent “a significant miss,” said David Garrity, director of research for Investec Inc. “You could say there was a little bit of exuberance in this stock that needed to be taken out.”

Garrity doubts investors will fully embrace Google until management provides another financial update during an analyst meeting scheduled March 2. Garrity predicted the stock price will range between $350 and $400 until then.

Until recently, it seemed like Google could do no wrong as its stock price rose to a new high of $475.11 shortly after the new year. Even as the company’s shares soared, most analysts continued to paint a rosy scenario by predicting the price would surpass $500 and maybe even reach $600 by year’s end.

But some investors began to fret about Google’s earnings momentum two weeks ago when Yahoo released a fourth-quarter profit that fell a penny below analyst estimates.

The jitters surrounding Google were exacerbated after the company vowed to fight a Bush administration subpoena demanding one week’s worth of search requests as the federal government seeks to revive a law designed to shield children from online pornography.

Google then provoked more angst last week by launching a new search engine in China that will censor some results to comply with the country’s free-speech restrictions.

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