Alphabet, the parent company of Google, recently announced results of its first quarter, and it was the largest revenue shortfall relative to expectations in years. This caused the stock price to immediately drop 9.7%, chopping about $68 billion off the company’s market value. The realization that growth was slowing was the rationale for this worst one-day decline in 6.5 years.
Naturally, Wall Street analysts want to know why. Unfortunately, that will be hard. A Wall Street Journal reporter characterized Google as a “financial black box,” because statistics like revenue and user information for the various Google ad-driven products, such as YouTube, search, Android, Chrome web browser, and cloud services, are swept into a group, and then only the very basic info, is provided for that group.
Consequently, as financial analysts try to understand what is going well and not-so-well, they are frustrated. They are looking for answers to questions such as: Which Google products are dragging down the results? Is YouTube just suffering a short-term blow amid efforts to better police sensitive video content? Are increased privacy controls at companies like Apple making it harder to tailor embedded ads? Is increasing ad-sales competition from Amazon hurting certain products of Google? A Wall Street analyst commented: “It’s hard for me to explain why someone should stick with this stock when I have no idea what the strengths and weaknesses are and how long specific problems are going to last.”
For years, analysts had been complaining about the lack of financial information from Google regarding its various products, but the company has ignored them. In 2015 Alphabet hired a high-profile finance person from Morgan Stanley and made her the CFO. Wall Street was hopeful that this would lead to much better transparency, but that has certainly not been the case. During the recent conference call with analysts after announcing the poor results, the CFO offered few specifics. When requested to provide some certain details, she used her usual response that such information was “competitively sensitive,” and hence not provided.
Google’s stonewalling is almost certainly hurting its ability to command the stock market premium you would expect, given industry norms. Specifically, Alphabet shares now fetch about 22 times forward earnings, excluding the company’s cash. That is well below the average of 35 times for peers represented on the Nasdaq Internet Index.
Seasoned leaders know that attempting to hide key facts from constituent groups is a huge mistake. It hurts your credibility and generates a fog around how things are going. Such behavior by Google/Alphabet has caused it to gain a reputation of smugness and arrogance and that is clearly not serving them well.