Google stock defies doomsayers

Its stock has soared 41% since IPO, becoming Internet's bluest chip

September 29, 2004|By Chris Gaither | Chris Gaither,LOS ANGELES TIMES

SAN FRANCISCO - The stock that struggled to get off the ground five weeks ago now won't come back to earth.

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

The stock price lost ground Friday and Monday, its second and third losing sessions in three weeks, but it surged $8.52, or 7.2 percent, to close at a record $126.78 yesterday after five of its underwriters gave it a "buy" rating, their highest recommendation, and predicted substantial gains.

The stock's rapid climb is reminiscent of some of Silicon Valley's rocket-ship rides in the 1990s, but there is disagreement over whether it can be sustained.

"I wouldn't buy it or recommend it to anyone here," said Andrew M. Schroepfer, president of Tier1 Research, who added that he wouldn't pay more than $110 for Google shares.

Quoc Do, the sort of small investor Google targeted in the IPO, said he has 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 such as Do who participated in Google's unorthodox auction have watched the value of their shares rise from the IPO price of $85. The holdings of people who bought at $100.34, the first trading day's closing price, have increased 19 percent.

Google has a market capitalization of $32.5 billion, more than that of Honeywell International Inc. and close to McDonald's Corp.'s.

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

Most of Wall Street was skeptical about the stock in the weeks before the IPO. The Mountain View, Calif.-based search provider hasn't made any major announcements, and 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.

But Google seems to be riding a wave of good tidings toward 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 technology 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 slump 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 as Google, although not as rapidly. Yahoo has gained 16 percent since Aug. 19. EBay has risen 12 percent, Amazon is up 6 percent, and search-engine provider Ask Jeeves Inc. has soared 27 percent.

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

Online ads generated a record $2.37 billion in revenue during the second quarter, 43 percent more than in the corresponding period last year, according to a report released last week by the Interactive Advertising Bureau and PricewaterhouseCoopers. The prior peak was during the dot-com boom.

Ads delivered with search-engine results, Google's bread and butter, pulled in $947 million, nearly twice as much as in the second quarter of last year.

A bigger factor in Google's rise, analysts say, is that investors can concentrate on whether Google is worth owning instead of 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 a traditional IPO - in which investment banks dole out shares to preferred clients, leaving out most small investors - Google executives decided to hold a Dutch auction, modeled on a method used to sell flowers in the Netherlands. In such auctions, investors submit bids for the number of shares they want and at the price they want to pay.

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

The auction 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 E. Page conducted with Playboy magazine violated "quiet period" regulations.

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

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

"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."

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