February 1, 2006 | posted by Michael Baxter in Uncategorized |

Pandora would have turned in her grave. She was the one who let hope escape from its box, but last night, the company with the biggest hope value in the world, saw expectations fall to a level which one would almost call normal.

We have become so used to seeing stunning performances from Google that any kind of results that are somewhere between good and okay and the stock plummets.

And Google, which once boasted a triple figure p/e ratio, based on future expectations of profits - or hope, is suddenly looking at a forward p/e which is not that out of kilter with other techs.

Yesterday the company revealed its results for its fourth quarter, and profits were $372.2mn that was a stunning 82% up on the same quarter last year, but analysts had hoped for more.

Even before the company revealed its results, the p/e ratio while steep was positively stingy compared to flotation. Its ratio of valuation to expected future profits was 50, based on 2006, and 37 based on the anticipated 2007 performance. But, in after hours trading shares fell 13%, and many expect the decline to continue, knocking billions of its valuation, and reducing the hope associated with the company to quite sedate levels, at least sedate by Google’s standards.

And yet, if you take a look at the performance, it really was not at all bad. Google itself does not do profit forecasts. The company’s founders of Brin and Page follow the motto of “do know evil” and maybe they felt profit forecasts smelt too much of evil empires.

But, an army of analysts and commentators have succumbed to the dark side, and their speculation had led markets to expect much better results. But, actually, it would appear much of the slow down in growth was due to a one off factor. The company is paying more tax - 40% this quarter compared to nearer 30% in the previous period. As it expands overseas, it’s finding itself paying local taxes that are far higher than the rates in the US. As a result, profits were reduced. But as the company settles abroad, and expansion across the various tax global bands follows a more uniform rate, then actually the fourth quarter performance extrapolated to future quarters would be close to meteoric again.

Then again, Google is facing tougher competition. Yahoo is breathing down its neck and some predict the rival company will start eating into Google’s advertising sales.

It does occur to us, that there could be a long-term problem with the Google business model. Key word sponsorship relies on imperfections of the search function. As search becomes more reliable, and yields better results, will there be any desire to click on paid for sponsored links?

Still with Google, the headline for today’s lead story could have been very different. The rumour mill had started grinding away suggesting the company was about to buy the iPod’s main rival, Napster. If that rumour proves true, then all of a sudden Apple and Google wil be going head to head. But, a Google spokesman denied the report, and as it’s evil to lie, one would assume the company is telling the truth; at least this will tell us how well Page and Brin are sticking to their credence.