SAN FRANCISCO – Is Google Inc. stock a golden opportunity or fool’s gold?
Investors have been arguing that question since Google’s initial public offering in August 2004.
But the stakes have grown progressively higher over the past 11 months as the online search engine maker’s shares zoomed past $200, then $300, and most recently $400.
“With every $100 that goes by, the risk-reward ratio gets less appealing,” said Hoefer &Arnett analyst Martin Pyykkonen.
Just seven years after the company’s inception in a Silicon Valley garage, Google’s market value has soared above $100 billion – eclipsing a long list of business icons that includes Coca Cola Co., Pepsico Inc. and Time Warner Inc.
While investors have been hungrily buying Google’s stock, company co-founders Larry Page and Sergey Brin have been busily cashing in. Through November, Page and Brin, both 32, had each made $1.3 billion by selling a slice of their controlling interest, according to data compiled by Thomson Financial.
But Google’s rapid run-up is making it more difficult to figure out how outside investors can make money on the stock, Stanford Financial Group analyst Clayton Moran said.
“I think the current price is justified, but I just can’t go out and tell my clients to buy the stock now,” said Moran, explaining why he downgraded Google’s shares to a “hold.”
“I think Google is a great company and it has been a great stock, but I don’t have a lot of confidence the shares will continue to ramp up,” Standard &Poor analyst Scott Kessler said.
Google’s shares, in fact, would probably tumble badly if the company were to miss its lofty earnings expectations.
Other thorny issues also could prick the stock.
The company is locked in a series of legal battles over trademark and copyright laws. Microsoft Corp. – armed with $40 billion in cash – continues to invest heavily in a strategy aimed at toppling Google.
Nevertheless, betting against Google so far has proven to be a lousy strategy.
When the company first went public, Google skeptics believed fierce competition would erode the company’s search engine leadership and its earnings growth. But Google has been widening its lead, giving it more opportunities for moneymaking advertising links alongside its search results.
Through October, Google held a 39 percent share of the U.S. market for online search, up from 34.8 percent at the same time in 2004, according to comScore Networks. Yahoo’s share has meanwhile declined to 29.2 percent from 32 percent a year ago, while Microsoft’s share has decreased to 14.6 percent from 15.8 percent last year, comScore said.
As Google has introduced more products to complement its search engine, securities analysts such as Benjamin Schachter of UBS Securities and Safa Rashtchy of Piper Jaffray have become convinced the company is bound to become an indispensable hub in a global economy increasingly driven by the Internet.
Google “is a paradigm-changing company,” Schachter wrote in a research report.
Rashtchy, who values Google’s shares at $445, also is confident that more riches lie ahead for the company.
To veteran investors such as venture capitalist Nick Sturiale, the unwavering enthusiasm for Google stock is being fueled by “the madness of crowds.”
“The only way you should touch the stock now is if you think the crowd is still crazy,” said Sturiale, a general partner with Sevin Rosen Funds in Palo Alto.
Other high-profile stocks in the technology industry generated tremendous returns even after tracing a trajectory similar to Google’s.
Since its IPO, Google’s shares have more than quadrupled from their IPO price of $85.
That’s with good reason. Google is expected to earn about $1.6 billion on revenue of $6 billion this year, quadrupling its profit from 2004.
The impressive earnings growth distinguishes Google from the throng of unprofitable dot-coms with stocks that soared during 1999 and 2000, only to crash after investors concluded the valuations were based on faulty math.
“Google’s value is based on reality,” Moran said. “It’s not based on the number of eyeballs looking at its Web page or other bubble metrics.”
Even so, Google’s stock remains fairly expensive by its price-to-earnings ratio. An abnormally high multiple is usually interpreted as a sign that a stock has become overpriced.
Google is expected to earn $8.53 a share in 2006, based on the mean estimate among 29 analysts surveyed by Thomson Financial. That gives Google a price-to-earnings multiple of 48, far higher than most stocks.
Whatever happens next, Kessler thinks it would be a mistake to presume things will continue to go as smoothly for Google as they have over the past 16 months.
“It’s really dangerous to think a company will have long-term staying power in technology, where things can change so fast and so dramatically,” he said. “Investors will respond to any chink in Google’s armor by selling.”
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