Investors punished Google for last night’s earnings performance by knocking the stock down 8% today.
While the earnings results were generally in line, two things spooked Wall Street.
First, Larry Page wasn’t particularly warm and fuzzy on the earnings call, and Wall Street analysts love to be massaged.
Second, Wall Street was put off by Google’s rising operating expenses brought on by its hiring binge.
In the chart below from Citi analyst Mark Mahaney, who downgraded the stock, you can see that Google’s cash cost per employee is the highest it has ever been.
Mahaney writes that, “Given that the company will pay employees more this year, incur greater compensation-related expenses (401K matching, employee taxes, etc.), and is planning to be aggressive in hiring new employees, we would expect Cash Cost Per Employee to continue to rise.”
Google is staffing up in growth markets like Chrome, YouTube, and “social”. It’s a smart long term strategy, but in the short term, which is how Wall Street thinks, it’s bad news for earnings since those divisions aren’t terribly profitable for Google right now.
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