Nervous investors on Thursday penalized two of the planet's most powerful technology companies, Google Inc. and Microsoft Corp., for showing some financial strain from the faltering economy.
After both reported solid quarterly earnings that fell slightly short of Wall Street expectations, Google shares dropped 7% in after-hours trading and Microsoft slipped 6%.
"In better, more favorable times, investors might be prepared to give [companies] the benefit of the doubt," Sanford C. Bernstein analyst Jeffrey Lindsay said. "But in this market, any sign of any weakness or bad news at all is seized upon, and no prisoners are taken."
Both companies performed better abroad than in their home country. Most of Google's revenue came from online ads outside the United States, which helped push second-quarter sales up 39% and profit up 35%.
The Mountain View, Calif., company reported earnings of $1.25 billion, or $3.92 a share, on revenue of $5.37 billion. Excluding stock-based compensation costs, profit was $4.63 a share, but analysts had expected $4.74.
"Investors had begun to warm up to Google as a safe haven in the current storm," said Anthony Valencia, media and entertainment analyst with Los Angeles-based TCW Group. "But today's results, while very solid, were a wake-up call that no company is immune from a consumer slowdown."
Microsoft's fiscal fourth-quarter profit rose 42% to $4.3 billion, or 46 cents a share, just missing the 47-cent target set by analysts. Sales gained 18% to $15.8 billion.
The Redmond, Wash., company trimmed its forecast for the new fiscal year, saying annual profit might be as little as $2.12 a share, down from the $2.13 it projected three months ago.
"Clearly, people are getting concerned about the length of softness in the U.S.," said Chief Financial Officer Chris Liddell. Noting "difficult economic conditions," Liddell said U.S. sales rose by 15%, much less than in the developing world.
Liddell said he was disappointed that Microsoft's stock wasn't reflecting its strong profit performance. The stock is now trading at less than 15 times the per-share earnings of the last 12 months, less than half the price-to-earnings ratio of a year and a half ago.
Sensitive tech investors bid down other companies.
ValueClick Inc.'s stock lost a fifth of its worth, dropping $2.76 to $11.01, after the Westlake Village-based Internet advertising network lowered its earnings guidance for the next fiscal year by about 11%. It cited a weaker economy and poor trends in display ads.
Top Internet auctioneer EBay Inc. plunged 14% to $24.20 as investors looked past a solid quarter, reported late Wednesday, and focused on the company's projection of a weak fiscal third quarter, with revenue falling short of the quarter just ended.
By traditional standards, Google's quarter would have been considered a blowout. But in addition to missing analyst targets, the king of Internet search fielded questions about when it would begin to grow revenue from video and mobile advertising or penetrate the display ad market through its acquisition in March of DoubleClick Inc.
Chief Executive Eric Schmidt acknowledged for the first time that his company faced "a more challenging economic environment" but added that Google hadn't been hurt by it yet.
He said Google continued to benefit as advertisers focus on more effective ways to spend shrinking budgets and the company extends its reach overseas. Its chief economist, Hal Varian, participated in a conference call with analysts to underscore how rising energy and food prices could drive price-conscious consumers to search for better deals online.
"Are we in a downturn? The answer is: We have not seen it yet," Schmidt said. "That doesn't mean it doesn't exist."
Microsoft's recent quarter included strong profit gains in the divisions that make Windows and business programs, while the entertainment and devices and online-services divisions both posted losses.
Analysts pressed executives about how long Microsoft would continue to pour money into its online effort, which continues to lose market share to Google.
Pointing out that much of Microsoft's profit is being funneled into search and other Web services showing only modest improvement, UBS analyst Heather Bellini asked, "How long should we expect that to continue?"
"I can't promise you that you're going to see a massive turnaround in the short term," Liddell responded. He said that after it became clear in May that the company was unlikely to succeed in buying Yahoo Inc. or its search business, Microsoft decided to invest more in its internal efforts.
"They tried the most direct approach, which was buying Yahoo, and that didn't work," RBC Capital Markets analyst Robert Breza said. "Now the investment community needs to hear more about Plan B."