After a Rocky IPO, Google Stock Is Up 41%

The stock that struggled to get off the ground just five weeks ago now won’t come back to earth.

Google Inc.’s shares have soared 41% since Aug. 19, when the Internet search titan held its hotly anticipated -- and fiercely debated -- initial public offering.

The price hit $124.10 in Nasdaq trading Friday before pulling back to end at $119.83. Although the stock lost 99 cents for the day, it was only the second losing session in three weeks.

The stock’s rapid climb is reminiscent of some of Silicon Valley’s rocket ship rides in the 1990s, but there’s some disagreement over how thin the air is at Google’s current height.

“I wouldn’t buy it or recommend it to anyone here,” said Andrew Schroepfer, president of Tier1 Research, who added that he wouldn’t pay a dime over $110 for Google shares.

But Quoc Do, the sort of small investor Google targeted in the IPO, said he had no plans to sell his nine shares.

“I expect it to be bumpy as more insiders start selling their shares, but in the long run I think it’s going to do well,” said Do, a software programmer from Los Angeles.

Investors like Do who participated in Google’s unorthodox auction have watched the value of their shares rise from the IPO price of $85. Even the holdings of people who bought at $100.34, the first trading day’s closing price, have increased 19%.

Google boasts a market capitalization of $32.5 billion. That’s more than Honeywell International Inc. and just shy of McDonald’s Corp.

It’s also a few billion dollars less than dot-com flameout Excite@Home was worth at its peak.

This from a stock most of Wall Street gleefully bashed in the weeks before the IPO.

So what gives?

The Mountain View, Calif.-based search provider hasn’t made any major announcements. It hasn’t done away with the practices that spooked many investors, including a two-tiered ownership structure and management’s refusal to issue financial guidance.

Instead, Google seems to be riding a wave of good tidings for Internet stocks in general. With the uncertainty of its unusual IPO in the past, there’s a growing feeling that Google shares, which trade under the ticker symbol GOOG, will become a blue-chip holding for tech investors.

“Right now the people that own the stock see it as very much a core holding, akin to a Yahoo or an EBay,” said Youssef Squali, an analyst with Jefferies & Co.

Internet stocks were just coming out of a seven-week funk when Google went public. Yahoo Inc., EBay Inc., Amazon.com Inc. and others had reported decent second-quarter profits, but their third-quarter and full-year forecasts disappointed investors.

Since then, other Internet stocks have climbed as steadily -- although not as rapidly -- as Google. Yahoo has gained 16% since Aug. 19. EBay has risen 12%. Amazon is up 6%. And search-engine provider Ask Jeeves Inc. has jumped 27%.

The rise has been fueled by the hot Internet advertising market, analysts say.

Online ads generated a record $2.37 billion in revenue during the second quarter, a 43% rise over the same period last year, according to a report released last week by the Interactive Advertising Bureau and PricewaterhouseCoopers. The previous peak was during the dot-com boom.

Ads delivered with search-engine results, Google’s bread and butter, pulled in $947 million, nearly doubling over the second quarter of 2003.

But a bigger factor in Google’s rise, analysts say, is the fact that investors can now concentrate on whether Google is worth owning, instead of on whether the company could pull off its unusual stock offering.

“The primary risk that most people perceived was associated with the IPO,” said Scott Kessler, an analyst with Standard & Poor’s.

Rather than mount a traditional IPO -- in which investment banks issue shares to preferred clients, leaving most mom-and-pop investors on the outside looking in -- Google executives decided to hold a Dutch auction, modeled after a method used to sell flowers in Holland. In such auctions, investors submit bids for the number of shares they want at a specified price.

One goal is to avoid big price swings after the IPO by determining demand for the stock before it’s sold. The process also tries to ensure that if the price is bid up, the company, not favored investors, will benefit.

But the auction process was beset with problems and bad publicity, including several Securities and Exchange Commission inquiries into such questions as whether an interview Google founders Sergey Brin and Larry Page conducted with Playboy magazine violated “quiet period” regulations.

By the time Google’s bankers sifted through the bids, they realized many institutional investors were unwilling to pay the $108 to $135 a share that Google had expected to fetch. They cut the number of shares to 19.6 million from 25.7 million and lowered the offering price to $85.

Many investors predicted that Google shares would hit the market and tank.

That didn’t happen.

“You have to separate out the deal process from the company,” said John Tinker, a ThinkEquity Research analyst who predicted when Google debuted that shares would hit $120. “The deal was not handled well.”

No one has benefited more from the stock’s run-up than Page and Brin. Forbes last week listed them in a tie for 43rd place on the list of the richest Americans. Their Google stakes are valued at $4 billion each.

Some investors also have been encouraged by the caliber of Google shareholders. Fidelity Investments, the world’s largest mutual fund manager, disclosed this month that it had bought 16% of all Class A shares.

Some market observers predict another bounce in the stock’s price this week, when the 40-day quiet period for large investment banks that participated in the IPO ends, freeing analysts to issue recommendations on Google stock.

There are still plenty of risks.

Google depends on Internet advertising for 98% of its revenue and so is especially vulnerable to a downturn in ad spending. The stock is priced at a lofty 52 times estimated 2005 earnings per share (although that is below the estimated price-to-earnings ratios of Yahoo and EBay). And in mid-November, when their lock-up restrictions expire, Google insiders can flood the market by selling 39 million shares.

“Right now people aren’t thinking about that,” said Standard & Poor’s Kessler.

“They’re thinking, ‘The stock is going up, and I want to be in on it.’ ”