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Report Snafu Throws Google’s Stocks Into a Spiral, $20B in Shareholder Wealth Wiped Out

Report Snafu Throws Google’s Stocks Into a Spiral, $20B in Shareholder Wealth Wiped Out


Despite being on the cutting edge of information organization, Google proved Thursday morning that even leaders occasionally stumble and fall.

This became painfully obvious after a contractor released the tech company's third-quarter earnings report more than three hours before the numbers were supposed to come out, triggering an 8 percent drop in Google's stock price that erased about $20 billion in shareholder wealth.

In fact, the downward spiral became so bad, Google was forced to halt trading on its stock:

Google Inc. blamed printer R.R. Donnelley & Sons Co. for filing the company's quarterly statement with the Securities and Exchange Commission more than three hours ahead of schedule.

"We are fully engaged in an investigation to determine how this event took place and are pursuing our first obligation, which is to serve our valued customer," R.R. Donnelley said in a statement.

The report was scheduled to come after the market closed at 4 p.m. Instead, a filing was made around 12:30 p.m.

Google said it was a draft. The second paragraph of the press release said "PENDING LARRY QUOTE," a holding spot for CEO Larry Page's prepared remarks. Google said Donnelley informed the company of the error after it happened. Google said it worked with the Nasdaq Stock Market to halt trading.

After a nearly three-hour trading break, investors decided the results weren't quite as bad as they initially appeared, and the shares recovered slightly.

Even so, the stock wound up dropping $60.49, or 8 percent, to close at $695.

But even without the early reporting mistake, Google's third-quarter earnings may signal trouble for the tech giant.

Google's ad revenue rose 16 percent from the same time last year, the slowest pace in three years. The company's ad revenue had climbed by at least 21 percent in each of the previous 10 quarters.

As noted by BuzzFeed's John Herrman, there was one sentence in the leaked report that shoudl have the higher-ups at Google worried:

Average cost-per-click, which includes clicks related to ads served on Google sites and the sites of our Network members, decreased approximately 15% over the third quarter of 2011 and decreased approximately 3% over the second quarter of 2012.

Keep in mind, ad revenue is how Google makes its money. Simply put, this is not good (for them, at least).

"Google makes virtually all of its money from contextual advertising in its own products, such as search and Gmail, and through partners that use its ad product, AdWords. That entire business model is based on the value of user clicks. (I click an ad in Gmail, Google gets a penny. I click on ad on a website that uses Adwords, the site owner and Google each get a half a penny," Herrman explains.

"The value of those clicks is going down, and there's no reason to believe it will go back up: this type of unintelligently targeted advertising is not popular on social networks, which are luring away advertisers, and AdWords specifically has no place on social networks that Google doesn't own," he adds.

As has been the case for the past year, the average prices companies pay Google for ads appearing alongside search results also fell.

Google earned $2.18 billion, or $6.53 per share, during the three months ending in September. That compared with net income of $2.73 billion, or $8.33 per share, last year.

Revenue climbed 45 percent from last year to $14.1 billion. Excluding compensation for websites that generate traffic for Google's ads, revenue was $11.33 billion. Analysts were expecting $11.86 billion.

Bottom Line: The thing Google relies on the most for cash flow is decreasing in value. This is reflected in the leaked report, this is one of the reasons why investors reacted so poorly, and this is something CEO Larry Page and his crew will have to address if they want to remain a leader among tech companies.

Follow Becket Adams (@BecketAdams) on Twitter

The Associated Press contributed to this report.

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