Digital Nerd

Tuesday, June 28, 2005

At $300 a Share, Google Looks Pricey and Still Irresistible

NYT reports:
SAN FRANCISCO, June 27 - David Edwards, a financial analyst with American Technology Research, wants to believe in Google. But how do you embrace a stock that has more than tripled in 10 months and cracked the $300-a-share barrier so quickly since going public that much of its growth potential seems already built into the price?

In early May, when Google was trading for $236, Mr. Edwards sent a note to clients of his firm, a group that includes wealthy individuals and money managers, recommending that they buy Google stock.

But Mr. Edwards, who has been analyzing publicly traded stocks for seven years, acknowledges that Google has him flummoxed now that it has sprinted past $300, to close at $304.10 on Monday, up $6.85. As the stock continues to climb as if it is 1999 all over again, many of his counterparts, including those working for more prominent investment banks, continue to recommend the stock.

Heath P. Terry, for instance, an analyst with Credit Suisse First Boston, predicted back in February, when Google was trading at just over $200 a share, that the stock would hit $275 within the year. When three months later the stock crossed $277, Mr. Terry raised his target price to $350, prompting several others to follow suit in the Wall Street equivalent of "can you top this?"

Mr. Edwards, too, says he believes in Google's long-term prospects, but he describes himself as stumped about the advice he should give clients in the short term.

"It seems like everyone has jumped on the price-raising bandwagon, which has left me sitting here and scratching my head," he said. He does not have the conviction to advise clients to buy the stock, nor is he pessimistic enough to advise them to sell. "Let's just say if I was owning Google stock right now, I'd be selling some," he said.

Few if any are suggesting that the torrid rise in Google's share price signals an industrywide bubble as in the late 1990's. Google, based in Mountain View, Calif., had more than $3 billion in revenue last year, almost all from its advertising business, and its profits have increased more than sevenfold since July 2004.

By contrast, most of the dot-coms that flamed out so spectacularly in 2000 and 2001 never turned a profit, if they even had much in the way of revenue.

Yet even some of those who were bullish on Google when it went public in August, at $85 a share, wonder if investors have forgotten some of the lessons of the 1990's.

Until recently, John Tinker, an analyst with ThinkEquity, a San Francisco-based investment bank specializing in growth companies, had set the highest price target on Google. Yet even Mr. Tinker uses the "B" word - bubble - when describing the market's giddy embrace of Google, even as he has a price target of $330 on Google.

"The good news is this is a one-stock bubble," Mr. Tinker said. "Remember, in 1998, everything went up. That's a huge difference this time."

At the close of trading on Monday, the cumulative worth of all shares of Google stock added up to $84.47 billion. That gives Google a market capitalization of nearly the combined worth of the other two publicly traded giants created by the Internet: eBay, worth $45.37 billion, and Yahoo, worth $49.83 billion.

Comparisons are also being made between Google and Time Warner, another company deriving the bulk of its revenue from advertising. Time Warner had a market capitalization of $79.19 billion at the close of the market on Monday, below Google's though it posted first-quarter revenue eight times that of Google, and profits about three times as large.

The increase in the share price has been good for Google's two founders, Sergey Brin and Larry Page. They each have about 36 million shares, according to a proxy filed in early April and updated Yahoo Finance data. At Monday's closing price, that would give each about $11 billion in stock, excluding options. In addition, they have each made more than $500 million by selling a fraction of their shares (about 4.5 percent apiece) since Google went public.

Any number of theories might explain the most recent run-up in Google's stock, which has risen 67 percent since April 1. Those range from data suggesting that Internet advertising revenue is rising by as much as 40 percent a year - a trend sure to benefit Google - to a herd mentality among mutual fund managers ready to declare that resistance is futile: to post the kind of returns that would put them in the upper echelons of performance tables, they need to own shares in Google.

"This is where you can say this is like 1998," Mr. Tinker said. "Institutions realize they can't afford not to be in, whatever the price."

Google executives, especially its two founders, were outspoken before its public offering in insisting that the company would not play by established Wall Street rules, unnerving any number of institutional investors. But, according to Vickers Stock Research, 38 percent of Google's shares were held by mutual funds and other professionally run pools of money in May, compared with 35 percent one month earlier.

"There's been a waving of the white flag," Mr. Tinker said. "People felt left behind."

Still, by comparison, 72 percent of mutual funds and other professional pools own Yahoo shares.

Mr. Terry of Credit Suisse thinks that even at its current price, Google is still worth buying, noting the company's aggressive moves to extend its core search business. On Monday, for example, it announced a new bit of software called the Google Video Viewer, complementing its effort to encourage users to submit their own video to its database and adding a "search within the video" feature.

John Battelle, the author of a book on Google called "The Search," to be published in September by Portfolio Hardcover, says it is only natural that people want to believe in Google. Those who wanted to believe that the Internet could make them rich might have learned a hard lesson in 2000 and 2001, but that did not mean the dream entirely died.

"If you really believe in something, you're looking for a place where you can prove you were right the first time," he said. "And Google is such a place."

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