Inflated Expectations, Inevitable Disappointment

So Apple missed too (net income doubles but falls short of estimates) … But the company's shares weren't off as much as Yahoo! yesterday after missing analysts' estimates by A PENNY. There were blog postings here and there and a few articles today that used the "B" word, as in bubble … bursting. Or the more restrained: Is the air starting to leak out?

The expectations for the top Internet firms—especially Google and Yahoo!—are, in my opinion, unreasonably high. A climate in which people expect these companies to produce triple-digit growth quarter after quarter is ludicrous and unsustainable. So maybe what we have is an expectations bubble. In fairness, those expectations have been fueled in part by the spectacular performance of these companies in the past 12 to 18 months.

But in the current market of inflated expectations, disappointment is inevitable and when psychology becomes "reality" then you have a kind of self-fulfilling prophecy. Case in point: this recommendation shift from "hold" to "sell." Indeed, if everyone starts to sell, that accelerates the leakage and—voila—the bubble effectively bursts.

Clearly, it's not as simple as that, but what is clear is that the stock market is driven by psychology (herd mentality) as much as it is by anything rational or empirical. I suspect that on Jan. 31, Google will beat estimates and everybody will be happy and buying once again.

But everyone should be a bit more sober when predicting the gains and upside and similarly less reactive on the downside.

_____________

Here's a roundup of financial analysis about Yahoo! from the Internet Stock Blog.