The share price of Google rose 16% on Friday after reporting better than expected second quarter earnings, $6.99 Earnings per Share (EPS) versus the consensus estimate of $6.71. This isn’t some speculative tech stock, this is one of the largest companies in the world. The 16% jump added $65 billion to the market cap of Google, the biggest ever one day increase in market cap. After the rally, analysts rushed to increase their price targets.
A couple of observations. Google is one of the most followed companies by analyst coverage, yet analysts were still unable to accurately forecast one quarter ahead. This quarterly earnings charade whereby companies focus on ‘surprising’ the market simply adds to speculation in long term assets.
No company is valued on one quarter of earnings; a company valuation is based on an estimation of a stream of cash flows far into the future, with companies allocating capital based on a long time horizon. So should we perhaps also question the efficient pricing mechanism of a market that values Google 26% higher – an addition $90 billion in market cap – in the space of a week after one quarterly earnings release?