October 21, 2005
Time to Short GOOG? (At least until tomorrow)
Posted by Victor Fleischer

It's a bizarro day for Glomming Google.  I'm usually the most pro-Google of the bunch.  Today, Gordon gets wowed.  He's impressed by Google's 700% increase over the third quarter of last year.  The market shares his exuberance, as the stock price popped to $335.

I'm less impressed.  The NYT story notes that last year's number was depressed $200MM by a one-time charger for settling a patent dispute.  So the real difference in profits isn't $350 vs. $50, but $350 vs. $250.  Still an impressive increase, but hardly the same thing. 

I never cease to be astonished by the amount of gamesmanship still tolerated by the accounting rules.  Why should settling a patent dispute give rise to a charge all in one quarter, rather than over time?  That doesn't make sense to me.  Settling the dispute would allow greater earnings in the future; this suggests the cost should be recovered over time.  Obviously, it's better for Google to eat the charge and not have the drag on earnings going forward.  But why do our accounting rules encourage this sort of distortion?  Or am I wrong about the rules?

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