Investors Finally Wake Up: Google Shares Are Overpriced!

15 February 2006

It had to happen, say the know-alls. What goes up must come down.

As, of course, it must - and did. Google shares reached their $475.11 peak on January 11, having been offered at just $85 at the IPO on August 19 last year.

Since when the share price has declined by 27%, hastened by a 16% drop two weeks ago when a robust set of Q4 results failed to satisfy a fevered Wall Street - disappointed that Sergey and Larry had failed to maintain their near-exponential rate of growth [WAMN: 02-Feb-06].

And following a pessimistic article in influential investment weekly Barron's Magazine, Google stock continued its southbound journey on Monday with a further drop of 4.7%.

The Barron's piece warned that Google shares could drop "as low as $188" (still a multiple of 2.21 on their IPO price six months ago). The article is a classic example of how consumer and investor sentiment rather than poor performance can mitigate against a company.

In the eyes of many, Google is not only "too successful" but is overreaching itself with non-stop incursions into others' backyards. But perhaps the greatest damage was done by the company's recent cave-in to Beijing's censorship demands on its Chinese site.

It seems that even in this cynical world, many expected Google to live up to its founders' much-vaunted corporate principle: 'Don't be Evil'.

But the internet phenomenon still has its supporters among the entrail-rakers. Many of the potential problems highlighted by Barron's were around in 2004 and 2005, as William Blair & Co analyst Troy Mastin reminded investors in a research note.

"While we agree that the company is facing more headwinds today than last year, most of the fundamental issues raised by Barron's are not materially different than 12 or 18 months ago," he argued.

Mastin was echoed by Citigroup analyst Mark Mahaney: "The simple takeaway is that Google owns the best fundamentals in the internet sector." He predicts that shares could recover to high of $490 in the year ahead.

While another haruspex, Safa Rashtchy of Piper Jaffray, is in ultra-bull mode with a forecast of $600 per share by the year end.

Data sourced from USA Today Online; additional content by WARC staff