Wednesday, February 01, 2006

Values, Market Valuation and The Logic of Business

In today's FT it is reported that Google shares drop more than 16%.

It seems that Google made the grievous error of meeting their predicted profit goals, increasing their revenue 97% in the quarter to $1.29bn. But they did not exceed their projections, and fell from a 109% growth rate in the previous quarter.

They were rewarded by the stock market by a loss of $20 billion in their market cap.

On the face of it it sure seems there is something out of whack with stock market valuations.

Perhaps it's why George Reyes, CFO is quoted in the same article, as saying:

Google has broken with Wall Street tradition since it went public by refusing to issue predicitions of what its quarterly earnings are likely to be, arguing that this sort guidance encourages companies to take a short-term approach to managing their businesses.


In another part of the paper, the Lex Column, does make an important point,

Google’s earnings miss, coupled with last week’s decision to bow to Chinese censorship, have broken its sheen of immortality. Expect more volatility as investors get used to the idea that Google can, in fact, do wrong.


While I take issue with describing a predicted result as an "earnings miss", Lex does highlight that even the most massive enterprises are not immune from the discipline of the GME.

The only sustainable advantage is the relationship with the customer, and with IAI, that is an advantage that is put to the test every day. The "brand", which supplies the context of meaning in which the service/product is delivered, is critical to the value created for the customer. If the customer doesn't like you, the perceived value you give is threatened. And there are lots of competitors eager for a chance to do better.

The other important issue is that Google is not always good, and that Wal-Mart is not only bad. They are both merely business organizations driven by business incentives and trying to make sustainable profits. You can ask for no more or less.

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