Google founders Sergey Brin and Larry Page pride themselves on flouting convention. They bypassed investment bankers when they first issued shares in August, 2004. Just days before the stock's debut, they drew regulators' ire by giving an interview to Playboy, which violated so-called quiet rules. And they made it a formal company policy not to issue financial targets, which almost every public company does quarterly. Investors didn't seem to care: The stock soared to $471 on Jan. 11 from $85 at the initial public offering.
Now the Google boys may have to swallow their pride and start striking a more cooperative stance with Wall Street. The company lost $10.8 billion in market capitalization in just 20 minutes on the morning of Feb. 28, after Google Inc. (GOOG ) Finance Chief George Reyes said at an investor conference that the company's growth rates were slowing. The stock rebounded slightly later in the day but still closed down 7%, and almost 25% off the Jan. 11 high. "When the stock is going up, people are less inclined to ask questions," says Scott Kessler, an equity analyst at Standard & Poor's (MHP ).
They're not afraid to ask questions now. "You have to wonder, is the first quarter going to be softer than people are expecting, and are they trying to manage those expectations?" says Martin Pyykkonen of San Francisco investment bank Hoefer & Arnett. Although Google issued a press release later on Feb. 28 that clarified Reyes' remarks, it gave no financial projections. Investors weren't satisfied; the following day the stock gained back less than a percent.
UNDERESTIMATED TAX BILL
The smart money is wondering if Google has the financial sophistication of similar media companies its size. In January it missed analysts' fourth-quarter earnings expectations. The bulk of the shortfall stemmed from Google's badly underestimated 2005 tax bill. The miscalculation itself wasn't the only thing that rankled analysts. They thought the company should have given a heads-up. "A public company should either give the owners of the company information or live in a world in which it has a discount," says Scott W. Devitt of St. Louis investment bank Stifel, Nicolaus & Co.
Google may be trying to change its stripes: It recently hired its first investor-relations manager. A truce with the Establishment, however, doesn't guarantee stock stability. As investors debate the future of the search engine business and the merits of Google's investments, some big investors are starting to lose faith in what had been an easy money maker.
By Mara Der Hovanesian and Sarah Lacy