Google’s management style invites stock volatility

NEW YORK — Google Inc. has kept its word.

“Google is not a conventional company. We do not intend to become one.”

So stated founders Larry Page and Sergey Brin in an April 2004 letter that accompanied the prospectus Google filed to become a public company. They were talking about the company’s appetite for risk and its willingness to sacrifice short-term results for long-term benefits.

But the statement applies more broadly, too. When it comes to Wall Street convention, Google usually goes the other way. That’s been true from the rarely used auction process the company held to sell its initial public shares to its refusal to provide quarterly earnings guidance to investors and analysts.

And it was true again Tuesday, when Google Chief Financial Officer George Reyes delivered an outlook that sent some investors heading for the exits.

“At the end of the day, growth will slow,” Reyes said, according to a Dow Jones Newswires report. “Will it be precipitous? I doubt it. I’m not turning bearish at all. I think we’ve got a lot of growth ahead of us. It’s a question of what rate.”

The comments didn’t seem all that revolutionary. Yet Google shares shed $27.76, or 7.1 percent, to close at $362.62 Tuesday on the Nasdaq. Volume was about 36 million shares, approaching triple the average.

Maybe it’s the sky-high price of Google’s stock that makes it ever vulnerable to quick swings. Maybe it’s that Google so rarely makes forecasts that investors jump at every nugget of information the company offers. (In fairness, Google has scheduled an analysts’ meeting for Thursday.)

Or maybe it’s that Reyes made his comments at a Merrill Lynch investor conference. Yes, his presentation was open and available to all who wanted to listen via webcast and duly announced in advance. Still, it’s not exactly the way Wall Street expects things to happen. There was no press release accompanying Reyes’ comments. And his language was pretty straightforward, which in itself is a welcome if unusual event.

While Reyes said things that some investors considered discouraging, he said upbeat things, too, including, “There’s been a huge acceleration in the level of innovation in the company.” He also said opportunities in the search-advertising market remain “immense,” Dow Jones Newswires reported.

But investors have reason to be chagrined by the company’s studied iconoclasm. Google should be lauded for having used the auction method for its IPO — it’s a fairer way to price and distribute an initial stock offering — but its decision not to give regular financial guidance is a mistake.

The companies that avoid guidance usually cite the high-minded reason that eschewing it allows them to concentrate on the vaunted long term, rather than having to manage to meet quarterly Wall Street expectations.

Handled properly, however, earnings guidance and a long-term perspective don’t have to conflict. Investors can be told of short-term earnings sacrifice for long-term potential gain, and short-term forecasts can be adjusted if things change.

Regular forecasting couldn’t hurt. But that would be conventional.