Google Shares Slide 4.7% as Stock Decline Deepens
Google Inc. is discovering the trouble with life at the top on Wall Street: Slight stumbles can turn into serious falls.
The Internet search giant’s shares dropped 4.7% on Monday, deepening a decline that has slashed more than a quarter from the company’s market value since mid-January.
Quite apart from the monolithic image it projected in 2005, Mountain View, Calif.-based Google increasingly is being viewed as a company vulnerable to competition. That was highlighted in a cover story in Barron’s magazine last weekend.
Barron’s speculated that the stock could slide 50% under a scenario in which Google would fall well short of bullish analysts’ 2006 revenue estimates.
Competitors Microsoft Corp. and Yahoo Inc. are gaining on Google in search technology, Barron’s said. And as businesses become more sophisticated about Internet marketing, Google could face mounting pressure to lower prices for online advertising, the magazine said.
The company itself sowed doubts about its prospects with its fourth-quarter earnings report Jan. 31. Profit jumped 82% from a year earlier, but the results were below analysts’ consensus expectations.
What’s more, Google has alienated some of its users by launching a censored version of its search engine in China to adhere to that country’s government restrictions on free speech.
All of this has helped pull the company’s shares down nearly $126, or 26.7%, since they reached a record closing high of $471.63 on Jan. 11. The stock slumped $16.91 to $345.70 on Monday.
Yet most Wall Street analysts remain upbeat on Google. Citigroup Inc. analyst Mark Mahaney on Monday reiterated his belief that the stock would bounce back to $490 in the next year.
“The simple take-away is that Google owns the best fundamentals in the Internet sector,” Mahaney said.
Hoefer & Arnett analyst Martin Pyykkonen said the stock was undergoing a housecleaning of its investor base as short-term, “momentum"-oriented investors cleared out. That could leave a more stable class of long-term investors, he said.
At RBC Capital Markets, analyst Jordan Rohan said Google shares might fall as low as $330 in the near term, but that at this point the price was far more likely to rise than to fall.
“People are seeing Google’s glass as three-quarters empty instead of what it really is, which is three-quarters full,” Rohan said.
As the stock has fallen, so has its price-to-earnings ratio. Based on analysts’ consensus earnings estimates of $8.85 a share this year and $12.06 in 2007, the stock sells for 39 times this year’s estimate and 29 times next year’s.
Although the average blue-chip stock is priced at about 16 times estimated 2006 earnings per share, Google’s price-to- earnings multiples aren’t outrageous for a fast-growing company, many analysts say.
“If paid search isn’t broken -- and Google is the leader -- and Web advertising isn’t broken ... then you have a hard time arguing Google merits less than a 30 times P/E multiple,” Rohan said.