Imagine you’re the biggest search engine in the world, in the midst of a major transition from high-cost desktop advertising to lower-margin mobile ads, and you still manage to bring in US$20.26bn. You also add $10bn to your cash stockpile, taking it to $75bn.
But you missed Wall Street’s revenue estimates by $120m. Yes, just $120m on revenue of $20bn. Last month the markets hammered Google’s new holding company Alphabet, shaving 6% off its market share in after-hours trading that day.
As the New York Times summed it up: “European regulators brought the hammer down on Google this week, and investors barely blinked. But when the company’s first-quarter numbers came in a little light on Thursday afternoon, its stock immediately plummeted.”
As Colin Gillis of BGC Partners told the paper: “There’s nothing wrong with this company. They spent a bit more and took in a bit less than we thought, so Mr Market is having a mood swing. But it was a fine quarter.”
Something similar happened over at Microsoft, which also announced its results last month. Despite the PC market – where Microsoft has traditionally made all its money – declining by 9%, which dragged chipmaker Intel’s market cap down, Microsoft had pretty solid earnings in a harsh environment.
Its revenue fell to $20.53bn – from $21.73bn the year before, which, granted, doesn’t look good. But considering the largest maker of software has managed to reinvent itself as a cloud-service provider, second only to Amazon, you’d expect a little good will from Wall Street.
Twitter is in the same boat. Its results announced last month were up 36% year-on-year to $595m, but missed the Wall Street average expectation of $607.8m. That’s a $12.8m difference. Its users – which dropped 2m in the previous quarter to 305m – bounced up to 310m. Still, it lost 14% in after-hours trading.
“So here is a company that makes $500m a quarter on 140-character messages, and it’s considered an abject failure by Wall Street,” author Douglas Rushkoff told me at the South by South West conference in Austin, Texas, in March. This was based on Twitter’s revenue of $710m in the last quarter of 2015; which, by the way, was an increase of 90% over the previous year’s quarter.
“Twitter’s mistake was selling itself to venture capital and then selling itself to Wall Street in an IPO. That’s because those investors want to make a hundred times, a thousand times, on their investment.”
And it will get worse, he added. “The problem is that Twitter will now have to sacrifice the quality of what it’s doing, that Twitter is going to have to destroy itself on some level in order to try to extract more value from its marketplace.”
“The tragedy is that a $500m-a-quarter business is a failure; that it can’t stay on.”
Wall Street is a cruel beast and it’s obsession with quarterly growth is killing the companies that are listed on it.
In the past, only Apple CEO Steve Jobs and Amazon chief Jess Bezos were able to thumb their nose at these unrealistic growth expectations. But now, even Apple’s share price has fallen to earth, as its unprecedented 13-year run of quarter growth has come to an end.
Amazon – which generally tends to plough its profits back into growing its various businesses – unusually declared a profit, raking in $29.13bn revenue compared to $22.72bn the previous year.
A not insignificant portion of that comes from its cloud-computing business – a chunk of which was developed in Cape Town, in case you don’t know – and not the lean margins of the its e-commerce online store that it is mostly known for.
The problem isn’t the performance of these big tech firms but Wall Street’s unrealistic expectations of what their growth should be. Simply put, Wall Street is the problem.
