Google's earnings came out a few hours early last week due to a computer glitch. Some observers are blaming the glitch for a drop in Google's stock price. The fact that the earnings were awful is almost cited as an afterthought:
Among the litany of issues, the Internet search giant's profits slid 20% from a year earlier to $2.18 billion, or $6.53 a share. Revenue rose 45% to $14.1 billion, thanks to the incorporation of Google's new Motorola hardware unit.
Google lost $22 billion from its market capitalization last week until trading was halted.
A similar thing happened during Facebook's initial public offering. The NASDAQ computer system stalled, and trading began a half-hour later than its scheduled start of 11:00 a.m. EST. According to CNN:
The next half-hour was full of handwringing and confusion, until shares began trading around 11:30 a.m. Trading was fast and intense, with more than 80 million shares changing hands in the first 30 seconds.
Soon, some traders began complaining that it didn't seem like their orders were being completed. Others found that they were getting shares at a higher price than they expected.
NASDAQ, Facebook, and several investment companies are facing lawsuits from would-be shareholders as a result of that glitch.
If the stock market were a baseball game, there would be two strikes, two outs, and no men on base. In fact, glitches are running rampant. To keep the sports analogy alive, substitute refs have been blamed for several NFL teams' less-than-stellar win-loss records. Play review was implemented to offset poor judgment on the field. Anyone in New England or Green Bay will tell you that isn't infallible, either.
I've always had mixed feelings about reviewing calls in professional athletics. Sports are games of chance as well as talent in which a split-second decision — a ball or a strike, a completed or incomplete pass — makes all the difference in the world. The reason calls can be reviewed is simple: money. Bad calls win or lose a game. Win-loss records impact fan attendance and network contracts, which, in turn, affect a team's payroll. On it goes.
The stock market also has a risk aspect to it in which split-second decisions have a significant impact. Because there is so much money at stake, a case can and has been made for hitting the reset button (or, in the case of Google and Facebook, halting trading for a time). Still, Google's earnings were lackluster, and Facebook hasn't brought much to the party since its IPO. Those are the reasons for stock underperformance, not random glitches.
There are indications that Facebook's value proposition is about to change:
A new product that extends Facebook's business from advertising into commerce is one of a series of initiatives that could very well make that surge possible. And it is a good reason to buy the beaten-down shares, even if Tuesday's earnings report brings more bad news.
Frankly, I've never thought Facebook's stock was undervalued. The company has one product: Facebook. If it can expand its market, as Google has, its stock should be priced on its merits. If Google, Facebook, or any other company that has faced glitches boosted its stock the old-fashioned way — by earning it — computer glitches would become a secondary issue.
What do you think about reviews and trading halts? Better yet, what penalties would you call? Trade interference? Roughing the trader?