On October 16, 2014, after the close of the market, Google announced that its earnings per share (EPS) were $6.35 per share versus “analysts’ expectations” of $6.53 per share. Revenue totaled $16.52 billion versus “expectations” of $16.57 billion. The shortfalls were 2.7% and 0.3%, respectively.

More troubling, Google reported a slowdown in the total number of ads (paid clicks) in the third quarter, rising only 17% year-over-year versus expectations of 22%. And revenue growth at Google’s own websites was only 20%, down from 23% in the second quarter.

Google also reported continuing aggressive capital expenditures ($2.42 billion in the third quarter, down slightly from the second quarter’s record level of $2.60 billion. Google also increased employment by 2,400, noting it has 55,030 employees at the end of the third quarter. If you are planning an expansion and you require new talent make sure that you use professional job recruitment services to ensure that you will have the best candidates for the position.

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The market knocked some 6% off the equity market capitalization of Google in after-hours trading (don’t they ever sleep?). At Google’s market cap of more than $360 billion, that represented a decline of about $22 billion.

So revenues are growing, earnings are strong, but exhibiting margin pressure in light of massive hiring, and things are bad?

Looking this on the afternoon of October 21st, virtually all of the decline registered October 16th had been recovered.

Recall Netflix

Recently, I wrote about the third quarter announcement from Netflix. Netflix announced a slowdown in subscriber growth that literally tanked the stock. It fell from $445 per share to $334 per share in after hours trading (do they ever sleep), or $115 per share (or about 26%). This decline was just under $7 billion, but Netflix doesn’t have nearly the market cap of Google.

As of this evening, the stock closed at $366 per share, marking a pickup of $32 per share from the recent trough, but only a small portion of the initial loss of $115 per share.

Upon reflection, “the markets” seem to have forgiven Google for missing expectation this quarter and to have bought into their reinvesting for future growth story.

Upon reflection, “the markets” are not yet believing the hoped for story of revived rapid growth at Netflix.

Upon reflection, may the markets believe that Google is doing more of the right things to keep on its growth track than Netflix.

Thoughts for Private Company Owners

So what is the story at your company? Do your investors believe it? Do you believe it?

I’m always looking to the public markets to try to take lessons away for private company clients.

One thing I think is sure. Private company (value) volatility regarding expectations is probably lots lower than in the public markets. The exception to this might be during a negotiation process for a sale of a business. Surprises prior to closing can be devastating to value and to transactions.

Private companies don’t announce earnings to a critical public every quarter – although they certainly should announce them internally. With a longer term view, it is generally easier to overlook or to understand a temporary shortfall in private company “expectations.”

But we still must have expectations, even in private companies!

From the recent Google and Netflix announcements and the markets’ reaction to them, we might infer the following thoughts for private company owners and managers to consider:

• Identify the key financial and volume metrics for your business. Every business has one or more.
• Track these metrics over time so that you know what is happening with them and are always working to understand what is influencing them and what you can do to move them in the right directions.
• Set “expectations” or goals for these key metrics and focus the attention of your management team on achieving them.
• As you meet goals, revise them and repeat the process.

And finally, the more believable your story is, the more forgiving will “the markets” be regarding your value. And you will have to figure out just who represents the relevant markets while you are growing.

Unlocking Private Company Wealth

My new book, Unlocking Private Company Wealth, is available through this website. Buy additional copies to share them with your fellow owners, family, key management and advisers. It will open conversations that you need to have. One of the reviewers says in the front matter of the book:

I believe every family member owner, especially those who don’t work in their family’s business, needs to read Chris’ book. It is an excellent framework for understanding the importance of their investment and provides essential concepts to assist them in understanding and measuring for themselves the value of what is, for most, the largest asset in their investment portfolio. I plan on sharing it with our Family Council as a great educational tool for our family owners.

As always, please do comment on this blog. Or call me (901-685-2120) or email me (mercerc@mercercapital.com) to discuss any valuation-related matter in confidence. I am having an increasing number of conversations with business owners about issues related to ownership and management transitions.

Until next time, be well!

Chris