Google and Earnings Guidance

Date: February 18th, 2014

Re: Google and Earnings Guidance

-------------------------------------------------

Recommendation

Google should retain its current guidance policy and similar large, publicly-listed technology companies should also consider adopting similar policies for their own firms

Background

On August 19, 2004, Google Inc. held its initial public offering, with an opening price of $85 per share. By 2005, Google’s stock price had climbed to well over $400. However, over the next few years, Google’s stock price began to struggle and many investors blamed the stock’s volatility on Google’s unwillingness to release quarterly earnings guidance to the public. On August 19, 2010, Google’s stock price fell from $625 to $467.97 a share, prompting one Wells Fargo analyst to state that investors no longer saw the company as a “growth darling” in the market. In the six years since its IPO, Google has remained adamant about its no guidance policy. Recently, Google has begun expanding its business beyond its internet search engine, developing new products, entering new markets, and carrying out major acquisitions of other companies.

Earnings Guidance

When senior managers of publicly listed companies disclose earnings forecast this is referred to as earnings guidance. Guidance is usually given in one of three forms: point, range, or bound estimates. A point estimate provides individuals with a specific estimated price per share (i.e. $0.10 per share), a range estimate provides a span of estimated prices (i.e. between $0.08 - $0.12 per share), and a bound estimate provides an estimate based off of a threshold value (i.e. at least $0.08 per share). Qualitative statements about the estimates for the earnings are also considered guidance. Guidance is completely voluntary and varies across firms. In 2005, only 52% of large publicly-listed companies like Google provided quarterly earnings guidance, and as of 2009, 40% of such firms...