Google's stock soars, but why?

Posted: Friday, November 12, 2004

NEW YORK (AP) Sometimes when stocks soar, it has nothing to do with investors' genuine interest in the company's prospects. They just buy because the stock is going up.

That jump-on-the-bandwagon approach was often seen during the late 1990s boom, when so many stocks raced ahead without much of a reason, and now it may be contributing to the rally in Google Inc.'s stock.

Google shares have more than doubled in value in the three months since the Internet search engine company's stock began trading, and the stock continues to be the talk of Wall Street. That makes it all the more crucial for investors to consider what's really driving that run-up before they dive in.

Even though Google was expected to be the biggest IPO in a long time and had a solid brand name, no one expected this kind of response to the stock. That's especially true of all the critics out there before the IPO who talked about the risks of a company that directly competed with more established giants such as Yahoo Inc. and Microsoft Corp.

Those concerns seemed justified after Google, just weeks before its IPO, lowered the target price for its stock from $108 to $135 a share down to $85. Maybe, some thought, Google wouldn't live up to its pre-IPO hype.

But those doubts faded fast as soon as the stock hit the street on Aug. 19. Day 1: Google shares close over $100. A month later, its stock sat at $119. Two months later: $147.

Then on Oct. 21, the Mountain View, Calif.-based company reported earnings that came in significantly better than expected. For the third quarter, Google earned 70 cents per share, topping Wall Street's expectations of 59 cents. The company brought in $805.9 million in revenues, more than twice the $393.9 million from the third quarter a year ago.

That news sent Google's stock soaring over the next several weeks, crossing the $200 a share threshold for the first time last week.

Clearly, investors were impressed with the strong earnings and they expect the same kind of results looking ahead. Same goes for Wall Street analysts, most of whom have raised their profit forecasts and upgraded their ratings on the stock.

''This is a company that is built on a real business model,'' said Martin Pyykkonen, who covers Google for the investment firm Janco Partners, Inc., in Denver.

But he warns, its stock is now ''priced for perfection'' so any hiccup such as a slowing growth rate or increased competitive pressures could throw it off its current course. And, as he points out, it doesn't help that other factors, outside of company fundamentals, could be pushing the stock ahead.

For one, Google may be attracting momentum investors, who buy solely because they want to get in on a stock that keeps going up. The shares may also be getting a lift from interest from big institutions looking to solidify a position in anticipation that the stock could be added to one of the major market indexes, like the Standard & Poor's 500.

There is also the likelihood that short-sellers those betting on the stock's decline are getting squeezed. In fact, about a third of its shares available for trading are being shorted, according to data through Oct. 15, the latest information available.

In addition, there is a very small supply of Google shares in the marketplace available to the public. But that will soon end as millions of shares owned by company insiders become eligible to be traded a troubling issue noted by UBS analyst Benjamin Schachter in a report issued last week which forecast some weakness in the stock over the next 12 months.

He points out that Google's float will increase 233 percent from about 27 million shares to 90 million shares by the end of the year, and will rise by an additional 200 million shares by the end of the first quarter of 2005.

With such factors in mind, the big question now is what's to come.

Chris Sherman, who writes a daily newsletter called SearchDay that tracks the Web search-engine business, thinks Google has deep pockets to fund its growth and has great opportunities for new business from companies all around corporate America.

Still, he warns that the company ''has grown so quickly and is being pulled in so many different directions, the challenge of the management team is to keep everything aligned,'' he said. ''Really, it is Google's game to lose.''

And only time will tell if Google can keep playing like it has.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org



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