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Thursday, June 26, 2008

Google (GOOG) could have a similar issue

Google's been talking about a lot of capital spending and higher opex putting pressure on margins since... well... forever. They were all talk until the last quarter, where it actually started to show up. Comscore's horrific data all through the March quarter led people to believe a miss was coming... so when they made numbers, the stock exploded higher. The fact is, though, Google mostly got there because of the currency translation benefits of their international business. My piece on their last quarter is worth re-reading.

The issues they had last quarter are likely to persist this quarter... the difference here is one of expectations. People were looking for RIMM to beat and raise guidance, so the stock got crushed on the margin shortfalls. People were looking for Google to miss so the stock exploded higher. I don't think people are looking for Google to miss anymore... and there were some alarming trends beginning last quarter. And when you get big like Google is getting, it's pretty tough to about face. Rising spending is likely to be an ongoing fact of life for them... and for shareholders.

I kind of imagine a conversation like this happening somewhere at the midday mutual fund research meeting today:

"What other stocks do we own that have very high growth rates and could be heading for a margin shortfall due to higher spending?"
"(gulp) Er I guess that could happen at Google too."
"Right. Start selling Google."

I'm short some.

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