I never understand this phenomenon of how shares instantly drop in value based on a single quarter of earnings that don't meet 'estimates.' Suffice it to say, I do understand a bit about markets, but maybe somebody can educate me further.
There is no way that individual investors are moving the stock enough in the minutes to hours post-earnings report to actually affect the price, so I'm assuming this is 'market makers' that are selling off shares and pushing the price down. But my question is... are they selling shares because they predict other people will sell shares and so they are simply 'beating' the rest of the market to avoid the predicted loss? Or are they selling the shares because they actually believe they are worth less due to the report?
Worth noting that those names highly likely point at index funds. In other words, a lot of those shares are economically in the hands of small investors.
Fidelity is mostly actively-managed, as is T. Rowe Price. They may still be owned by small investors, but they are not index funds. Rather, they're "mutual" funds.
State Street and BGI are 100% indexed, and Vanguard is 90% indexed.
Those are "institutional investors," not "market makers." Market makers try their best to hold 0 shares.
Note that some of Fidelity's shares, about 90% of Vanguard's shares, and 100% of BlackRock's [1] shares are held on behalf of index funds or index-linked ETFs. As passive holders, they do not trade on market news.
[1]: Barclays Global Investors is actually owned by BlackRock, not by Barclays.
Massively over-simplifying, the price of shares is what the last trade was at. So it does not require a high volume to change the price - just buyers and sellers agreeing on a different value.
And what is that value? The value of a share is the market's best estimate of the present value of the future revenue earned from owning that share. Those earnings can happen from dividends, stock buybacks, a takeover bid, etc. But fundamentally they are an estimate of future profits.
So why does it move so fast? If you tell me that a major metric, the revenue/ad, dropped 5% and all else held the same, unless you have a good explanation for the anomaly, my simplest estimates of your future revenue just dropped 5%. If I am afraid that the drop could be a long-term trend, my estimates might drop further. If I believe that the metric has reasons to recover, my estimates might drop less.
But the natural tendency is to base estimates of future revenue on current rates of revenue. So a one quarter drop in current revenue results in a corresponding drop in share price. (And vice versa.)
This is true. However 5 years ago the same could be said for a number of other tech companies including CISCO, Oracle, and Apple. Yet all have since paid dividends or done stock buybacks.
The market operates under the assumption that all other companies that stay profitable long enough will eventually do the same. And as long as management is seen as competent, is indifferent about whether "eventually" comes tomorrow or 20 years from now.
For an extreme example, the markets have long rewarded Berkshire Hathaway for its growth in profits, even though no money was returned in any way to investors for 40 years. (There has since been a small buyback.)
Wall St doesn't mind if it takes 5 years or 50. As long as they know how to crunch the figures for current value, and can speculate about future revenue.
Don't forget that employee stock compensation also involves repurchasing shares off the market - which means some of the company's earnings do make it back to investors.
Actually I will try to forget that, because it is wrong.
Many companies have the ability to cover employee stock compensation by issuing more shares. This dilutes existing ownership rather than returning value to investors.
If you want your eyes to glaze over, http://www.sec.gov/rules/final/33-8048.htm describes the SEC rules for how public companies need to tell their investors (who also generally own the company) what the risks are that their share of the company will diminish due to new stock being created for things like employee incentive plans.
Of course if you're an investor, your eyes shouldn't glaze over. Because we're talking large sums of money. For instance for Google in Q1 of 2013, we're talking something like $697 million of value transferred from existing investors to employees. (Search for "SBC" in http://investor.google.com/earnings/2013/Q1_google_earnings.... to see where I pulled that figure from. I won't guarantee that I read the filing correctly though.)
Dividends are only one way to value to companies. If Apple fired everyone tomorrow and stopped selling products, their stock would still have value because of the cash (and real estate, etc) they have on the books.
Buffet basically assumes that he is a better investor than his shareholders and by not paying taxes twice (corporate and individual) on dividends he will do better investing the profits and growing book value than his shareholders. Pretty good assumption so far.
Actually, no. Dividends don't give companies value. (In fact every time you pay one, your stock price drops by the amount of the dividend.) They return value to shareholders.
Yes, you're right about Buffet. And because the market is indifferent about when money gets redistributed, they are happy at this point to pay around $100K/share despite those shares having value tied up in a company that has shown very little willingness to distribute any earnings to investors.
False. Stock price will increase when an (unexpected) dividend is announced. An investor will gladly pay $1.50 extra for the stock right now if they will receive a $2 dividend in the future. Keep in mind that the dividend announcement date is different from the payment date.
But you are correct that dividends do not add value to the company. The stock price increases by $2 but the company pays out $2.
They can make money on volatility, up or down. My uneducated guess is that they use the quarter figures as an indicator to make it easier to push the price down.
I don't think there is any long term reason for the stock to go down based on the latest quarter. Google are putting more ads in front of people, which means those bidding lower are getting more clicks, that will be why the average cost per click is down.
Google is making big changes in shopping and ecommerce ads which they stand to make a lot from long term.
>are they selling shares because they predict other people will sell shares and so they are simply 'beating' the rest of the market to avoid the predicted loss? Or are they selling the shares because they actually believe they are worth less due to the report?
Those are two sides of the same coin.
Stock prices are probabilistic in nature, because we're all operating with incomplete information. Consider an envelope that has randomly been prepared with either a $1, $5, or $10 bill inside (let's say someone rolled a die to determine the bill, put the bill inside, then gave it to someone else). Assuming equal probabilities of each bill, the envelope would have a market value around $5.30. If you wanted to buy it, that's about what you'd have to bid to win. Now imagine the person who prepared the envelope revealed that the $10 was not inside. Everyone bidding more than ~$2 would retract their bids, so now you only have to bid ~$2 to win it. They don't believe the value of the envelope actually decreased (the bill stayed the same), but now they have information that changes the market price.
> Suffice it to say, I do understand a bit about markets
> so I'm assuming this is 'market makers' that are selling off shares and pushing the price down.
No. That is not what a "market maker" does.
A market maker does not take directional positions on a stock -- either long or short. Their goal is to make money on the bid-ask spread, and they try to maintain a net-zero position, so far as is practical.
The purpose of a market maker is to provide liquidity, by ensuring a sufficient tight bid-ask spread. By definition, this means that they are buying when others are selling, and selling when others are buying. Thus, if Google shares are going down due to selling pressure, then market makers would be buying.
The shares instantly drop in price because the price of a stock is based on the perceived value of the company. A release of new information can instantly change the value investors perceive a company to have. Shares of public companies like Google are being bought and sold every second, so a change in perceived value is reflected instantly in actual sale prices. However, buying and selling isn't necessary to change the perceived value of a stock. The perceived value of a share of a private company could change even if nobody is buying or selling shares at the moment. So, a change in stock value isn't necessarily related to a change in the number of shares people want to buy or sell.
Once the news hit, there was a demand for a discount on the stock, for obvious reasons, with nobody willing to sell at more than a 5% discount, so there you go, an instant 5% move to where a buyer finally found a seller.
If you're asking why sellers were willing to sell at that price, well, there were plenty of people willing to sell at a 4% discount instead of a 5% discount, but no buyers. All market participants have different opinions on the effect the news had on future cash flows, but the 5% magic number was the place where there was a consensus between bulls and bears on a fair price. The price of the stock only shows you where a consensus between a buyer and seller was reached, and doesn't tell you much about the structure of the order book or option chain for a stock, which indicates a lot more about what all market participants think about a stock.
At a high level, we can consider the current buy demand to be weak based on the new information.
If bad news just came out, would you immediately want to buy? No, you'd probably wait. That overall pressure results in a downward movement in price.
Further, there is pressure for current holders to sell because they know there is going to be downward pressure. They can sell without much concern. Even if they really want to maintain their position, they can sell short term and buy back in later at a lower price.
The more significant the news, the more obvious the pressure will be and at a higher expected intensity - so more people will behave as described above.
Warren Buffett says stock prices are like a crazy guy knocking on your door everyday and throwing out a random number which "supposedly" represents your stock's price for the day.
That's how much stock prices represent reality and the worth of a company.
Because it affects earning estimates going forward, if they "beat", analyst can raise estimates looking out 5 years [so the results look like they are on track to be way better than estimated], or vice-versa, when you miss you have to take down your future estimates of growth. Then its discounted to the present. Thats why it moves, its not about this quarter, its about adjusting all the expectations of the future down and to the present, all wrapped up nicely in a stock price.
Doubtful... my guess (since I don't care enough to actually read their financial statements) is that the lower CPC is because mobile is growing faster than desktops.. and so they're getting more mobile clicks (which pay less). So in this case, after it's averaged out, they end up with a lower CPC.
Mobile search is ripe for innovation. Apple (and MS, Nokia, RIM...) can disrupt mobile search by providing a richer and more engaging search feature customized for mobile devices. The search box just isn't cutting it anymore.
Really off topic (sorry), but maybe G's quarterly results reflect the overall economy?
I was hiking with some friends today and someone raved about the stock market. I said that I am getting out (I did this also in 2007) because I expected another recession. I hope I am wrong, but I think we are going to see another 2008 event, but larger. This would also effect tech stocks.
I really doubt it. If anything I think it speaks to the value placed on online advertising, which I'm rather pessimistic about in general. It is a huge leap to go from slightly missed quarterly results to a downturn in the overall economy.
Do you have anything to substantiate this feeling that there's a second recession coming?
That's fair, and I agree with you to some extent. Detroit filing for bankruptcy is certainly indicative of future trends as pension obligations and other long term expenses begin to mount, but the extent to which it affects the overall economy I'm not so sure about.
Probably the reason they're pulling a dick move and forcing everyone to Enhanced Campaigns which, among other things, forces you to bid on tablets and desktops together rather than allowing you to split them. They claim that conversions are virtually identical across these devices. However, our conversion on tablets is probably 1/10 that of desktop because we mfg & sell highly technical products for diy home remodeling and most tablet users end up just browsing casually for the info.
A few years ago to grow profits they forced all Quality scores down. I had keywords cost double and triple after that. I especially like when I add a keyword and initially it has a quality score of say 7 then a few minutes later the quality score is a 3 or 4. Hate to imagine what more they might do now that they "missed" expectations...
from what i understand (and on conference calls with our google reps), there's no more "tablets", it's a single category "desktops/tablets", but you can do "-100%" to exclude "mobile" (phones)
we were compelled to make the switch today, actually. it's gonna be an expensive Jul/Aug for us. we've adjusted some of our checkout pipeline so there's less typing for tablet users...eg paypal/amzn payment are shown first in list, less steps overall also. but it's not going to boost anything by an order of magnitude - basically just damage mitigation :(
>> Probably the reason they're pulling a dick move and forcing everyone to Enhanced Campaigns which
That's not a "dick move," it's calculated. They're betting you will not leave since they have all that traffic and can deliver eyeballs to your ads. At some point it will be too expensive for you. Some new guy will try for a while but long term it's nasty for Google.
>> A few years ago to grow profits they forced all Quality scores down.
These past two years many sites have been destroyed by Panda and Penguin and many have been forced to advertise to replace the lost traffic. Coincidence I'm sure.
There was a discussion on "How Google is Killing Organic Search" https://news.ycombinator.com/item?id=5971560 by essentially having all ads on the first page. I wonder for how long can Google keep doing that, before users and site owners revolt and leave /promote another engine?
Google, as a company, desperately needs new sources of revenue, Google Search is already over-monetized. I wouldn't touch Google at current stock prices.
>>>>Google, as a company, desperately needs new sources of revenue
It seems like every time they try and branch out from search and monatize some of their products, they fail miserably and then the pundits jump on them and tell them they should just stick with what makes them money - search.
Contrary to what they say about themselves, they can't really innovate. Search is what makes them. Can you imagine Google without it?
They'd be nothing.
All their existing products are copycat/published with the search leverage.
Imagine a rich kid who starts his own business. He thinks he's successful but it's his parents who feed him cash and make it easy for him. He never had to really fight for it.
It's the same with Google products - they can't fight for themselves, instead they rely on their daddy(search) to achieve success.
Now look at Apple or Samsung - they have many different products that are relatively successful. Meanwhile the big G only has one cow to milk - the search and they burden it with more and more ads with each quarter. They can't do it ad infinitum because too many people would run away from them. And it's not really improving, just abusing the previous success until it's still possible.
Larry Page should stop doing what he's doing. It's going to destroy this company sooner or later.
Does the stock price has to always rise? How much money do you really need? Just ignore cash and try to build something great, maybe then you will be able to truly innovate?
Perhaps they should reconsider some of their AdWords bans (not AdSense).
We got an apparently lifetime ban for misspelling "iphone" as "iiphone" when our ad mananger didn't understand why everyone else could put up ads for iPhones and we couldn't and kept getting these ads blocked (supposedly for trademark reasons, but our use was 100% legitimate).
Now there's no chance to talk to anyone in charge (typical Google "service") and they've lost a customer who has been spending 6 figure amounts/year. I am biased, but somehow I don't see what Google is gaining from this.
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[ 5.0 ms ] story [ 89.0 ms ] threadThere is no way that individual investors are moving the stock enough in the minutes to hours post-earnings report to actually affect the price, so I'm assuming this is 'market makers' that are selling off shares and pushing the price down. But my question is... are they selling shares because they predict other people will sell shares and so they are simply 'beating' the rest of the market to avoid the predicted loss? Or are they selling the shares because they actually believe they are worth less due to the report?
http://www.nasdaq.com/symbol/goog/ownership-summary
FMR LLC owns 18 million shares, Vanguard owns 12 million, Barclays owns 7 million, etc.
(I'm sure some of them are in my 401K.)
State Street and BGI are 100% indexed, and Vanguard is 90% indexed.
Note that some of Fidelity's shares, about 90% of Vanguard's shares, and 100% of BlackRock's [1] shares are held on behalf of index funds or index-linked ETFs. As passive holders, they do not trade on market news.
[1]: Barclays Global Investors is actually owned by BlackRock, not by Barclays.
And what is that value? The value of a share is the market's best estimate of the present value of the future revenue earned from owning that share. Those earnings can happen from dividends, stock buybacks, a takeover bid, etc. But fundamentally they are an estimate of future profits.
So why does it move so fast? If you tell me that a major metric, the revenue/ad, dropped 5% and all else held the same, unless you have a good explanation for the anomaly, my simplest estimates of your future revenue just dropped 5%. If I am afraid that the drop could be a long-term trend, my estimates might drop further. If I believe that the metric has reasons to recover, my estimates might drop less.
But the natural tendency is to base estimates of future revenue on current rates of revenue. So a one quarter drop in current revenue results in a corresponding drop in share price. (And vice versa.)
http://investor.google.com/corporate/faq.html#toc-dividend
The market operates under the assumption that all other companies that stay profitable long enough will eventually do the same. And as long as management is seen as competent, is indifferent about whether "eventually" comes tomorrow or 20 years from now.
For an extreme example, the markets have long rewarded Berkshire Hathaway for its growth in profits, even though no money was returned in any way to investors for 40 years. (There has since been a small buyback.)
Wall St doesn't mind if it takes 5 years or 50. As long as they know how to crunch the figures for current value, and can speculate about future revenue.
Many companies have the ability to cover employee stock compensation by issuing more shares. This dilutes existing ownership rather than returning value to investors.
If you want your eyes to glaze over, http://www.sec.gov/rules/final/33-8048.htm describes the SEC rules for how public companies need to tell their investors (who also generally own the company) what the risks are that their share of the company will diminish due to new stock being created for things like employee incentive plans.
Of course if you're an investor, your eyes shouldn't glaze over. Because we're talking large sums of money. For instance for Google in Q1 of 2013, we're talking something like $697 million of value transferred from existing investors to employees. (Search for "SBC" in http://investor.google.com/earnings/2013/Q1_google_earnings.... to see where I pulled that figure from. I won't guarantee that I read the filing correctly though.)
Buffet basically assumes that he is a better investor than his shareholders and by not paying taxes twice (corporate and individual) on dividends he will do better investing the profits and growing book value than his shareholders. Pretty good assumption so far.
Yes, you're right about Buffet. And because the market is indifferent about when money gets redistributed, they are happy at this point to pay around $100K/share despite those shares having value tied up in a company that has shown very little willingness to distribute any earnings to investors.
But you are correct that dividends do not add value to the company. The stock price increases by $2 but the company pays out $2.
I don't think there is any long term reason for the stock to go down based on the latest quarter. Google are putting more ads in front of people, which means those bidding lower are getting more clicks, that will be why the average cost per click is down.
Google is making big changes in shopping and ecommerce ads which they stand to make a lot from long term.
Those are two sides of the same coin.
Stock prices are probabilistic in nature, because we're all operating with incomplete information. Consider an envelope that has randomly been prepared with either a $1, $5, or $10 bill inside (let's say someone rolled a die to determine the bill, put the bill inside, then gave it to someone else). Assuming equal probabilities of each bill, the envelope would have a market value around $5.30. If you wanted to buy it, that's about what you'd have to bid to win. Now imagine the person who prepared the envelope revealed that the $10 was not inside. Everyone bidding more than ~$2 would retract their bids, so now you only have to bid ~$2 to win it. They don't believe the value of the envelope actually decreased (the bill stayed the same), but now they have information that changes the market price.
> so I'm assuming this is 'market makers' that are selling off shares and pushing the price down.
No. That is not what a "market maker" does.
A market maker does not take directional positions on a stock -- either long or short. Their goal is to make money on the bid-ask spread, and they try to maintain a net-zero position, so far as is practical.
The purpose of a market maker is to provide liquidity, by ensuring a sufficient tight bid-ask spread. By definition, this means that they are buying when others are selling, and selling when others are buying. Thus, if Google shares are going down due to selling pressure, then market makers would be buying.
If you're asking why sellers were willing to sell at that price, well, there were plenty of people willing to sell at a 4% discount instead of a 5% discount, but no buyers. All market participants have different opinions on the effect the news had on future cash flows, but the 5% magic number was the place where there was a consensus between bulls and bears on a fair price. The price of the stock only shows you where a consensus between a buyer and seller was reached, and doesn't tell you much about the structure of the order book or option chain for a stock, which indicates a lot more about what all market participants think about a stock.
If bad news just came out, would you immediately want to buy? No, you'd probably wait. That overall pressure results in a downward movement in price.
Further, there is pressure for current holders to sell because they know there is going to be downward pressure. They can sell without much concern. Even if they really want to maintain their position, they can sell short term and buy back in later at a lower price.
The more significant the news, the more obvious the pressure will be and at a higher expected intensity - so more people will behave as described above.
That's how much stock prices represent reality and the worth of a company.
Is the market justified in worrying about a drop in the average cost-per click, even when the number of paid clicks is rising?
I was hiking with some friends today and someone raved about the stock market. I said that I am getting out (I did this also in 2007) because I expected another recession. I hope I am wrong, but I think we are going to see another 2008 event, but larger. This would also effect tech stocks.
Do you have anything to substantiate this feeling that there's a second recession coming?
whitey on da moon!
we were compelled to make the switch today, actually. it's gonna be an expensive Jul/Aug for us. we've adjusted some of our checkout pipeline so there's less typing for tablet users...eg paypal/amzn payment are shown first in list, less steps overall also. but it's not going to boost anything by an order of magnitude - basically just damage mitigation :(
That's not a "dick move," it's calculated. They're betting you will not leave since they have all that traffic and can deliver eyeballs to your ads. At some point it will be too expensive for you. Some new guy will try for a while but long term it's nasty for Google.
>> A few years ago to grow profits they forced all Quality scores down.
These past two years many sites have been destroyed by Panda and Penguin and many have been forced to advertise to replace the lost traffic. Coincidence I'm sure.
Looking at their press release, ad clicks increased by 23% over the last year and 4% over the last quarter. What are they going to do for the next quarter when search already looks like this http://www.searchenginejournal.com/wp-content/uploads/2011/1... and https://gs1.wac.edgecastcdn.net/8019B6/data.tumblr.com/28762... ? Add even more ads?
Google, as a company, desperately needs new sources of revenue, Google Search is already over-monetized. I wouldn't touch Google at current stock prices.
Edit: Turns out that most people do not even realize that they clicked on ads, given how similarly they are displayed. FTC warned them and others to distinguish results from ads http://www.bloomberg.com/news/2013-06-26/ftc-tells-google-le...
It seems like every time they try and branch out from search and monatize some of their products, they fail miserably and then the pundits jump on them and tell them they should just stick with what makes them money - search.
It's a nasty cycle they're in.
They'd be nothing.
All their existing products are copycat/published with the search leverage.
Imagine a rich kid who starts his own business. He thinks he's successful but it's his parents who feed him cash and make it easy for him. He never had to really fight for it.
It's the same with Google products - they can't fight for themselves, instead they rely on their daddy(search) to achieve success.
Now look at Apple or Samsung - they have many different products that are relatively successful. Meanwhile the big G only has one cow to milk - the search and they burden it with more and more ads with each quarter. They can't do it ad infinitum because too many people would run away from them. And it's not really improving, just abusing the previous success until it's still possible.
Larry Page should stop doing what he's doing. It's going to destroy this company sooner or later.
Does the stock price has to always rise? How much money do you really need? Just ignore cash and try to build something great, maybe then you will be able to truly innovate?
We got an apparently lifetime ban for misspelling "iphone" as "iiphone" when our ad mananger didn't understand why everyone else could put up ads for iPhones and we couldn't and kept getting these ads blocked (supposedly for trademark reasons, but our use was 100% legitimate).
Now there's no chance to talk to anyone in charge (typical Google "service") and they've lost a customer who has been spending 6 figure amounts/year. I am biased, but somehow I don't see what Google is gaining from this.