How quickly we fall from grace. As Google’s stock continues to fall, its problems continue to mount:
- Concerns about recession exposure
- Concerns about dependence on a single product whose growth cycle is coming to an end.
- Concerns about lack of focus, lack of spending discipline.
- Concerns about senior executives cashing out and jumping ship (see Sheryl Sandberg)
- Concerns that underwater stock options and a falling or flat stock price will force an increase in cash and/or restricted stock compensation, putting additional pressure on margins.
One of the reasons Google’s stock multiple is compressing (in addition to all of the above) is that the company’s operating margin has declined steadily over the past year. If the company is forced to provide higher cash comp or more restricted stock to reward and retain employees, this will put even more pressure on margins.
Google has added more than 6,000 employees in the past year, more than one-third of its overall workforce. Now that the stock has fallen below its 52-week low, all of these 6,000 new employees are underwater. Now that Google has been public for nearly four years, moreover, almost all of Google’s pre-IPO employees are fully vested (and dynastically wealthy)–and many of them are probably bored.
If Google’s honeymoon period is indeed over–which it appears to be–a significant percentage of both groups of employees will probably be tempted to leave the company. To persuade them to stay, Google will likely have to offer not only fat new option grants but more cash and stock compensation. When you combine those expenses with recessionary revenue weakness, the approaching end of the search product cycle, and the tiny size of Google’s ancillary revenue streams, it’s hard to see how the company’s margins go anywhere but down.