August 24, 2004

After closing higher each of Google's first three trading days, its shares lost ground Tuesday.

After falling more than 5% early Tuesday, Google recovered slightly to trade at $105.08, down $4.32 for the day, or nearly 4%.

Coming after the three-day gain of 29% off of Google's $85 offering price, the downward movement Tuesday served as an inevitable reminder of the investment risks inherent in any stock, particularly that of a recently public, richly valued company facing deep-pocketed competitors.

Certainly, a decline of Tuesday's size isn't a shock, especially given the magnitude of Google's rise out of the block. As American Technology Research analyst Mark Mahaney opined when he initiated coverage on Google Friday, shares in Google are likely to be extremely volatile -- a reason for investors to be "highly price-sensitive" when investing in the company.

"GOOG will be the 'Beta King' among Net stocks," wrote Mahaney, who assigned a hold rating and a fair value target of $110 on the stock.

So not that one would need a reason for Google to decline on a particular day, but one did arise on Tuesday: a report from the New York-based independent research firm Spelman Financial, which initiated coverage on Google with a sell rating.

Though Google's share of the U.S. Internet advertising market will go from 15.5% in 2003 to 26.7% in 2004, writes Spelman analyst Stelian Mitu, the company's growth rate will likely slow down sooner than the current market valuation implies.

"Our estimates indicate that next year ... revenue growth may slow from triple digits to double digits, and within five years, GOOG will likely need to reinvent its business plan as revenue migrates into single-digit growth," writes Mitu.

Mark Williams, an executive-in-residence and lecturer who teaches risk management at Boston University, says he believes investors are underestimating two major risks facing Google: the likelihood that its margins will decline amid increasing competition, and the threat posed by yet-unknown entrants in the search business.

"At 50, it seems to me a good stock to own," says Williams, who doesn't own Google shares. "At 100, it's not there."

Expectations for Google are high, he warns. "If they miss any earnings estimates, their stock is going to be pummeled," says Williams. "If they get anything less than the gold in the Olympics, then the market is going to penalize them."

Other search engine stocks were mixed Tuesday. Yahoo (YHOO), parent of chief Google rival Overture Services, dropped 22 cents to trade at $28.41. Ask Jeeves (ASKJ) fell 33 cents to $26.71; FindWhat.com (FWHT) rose 29 cents to $15.20; and LookSmart (LOOK) dropped 2 cents to $1.52.

The big-profile micro-cap Mamma.com (MAMA) fell 24 cents to $5.78.

Source: The Street.com

        

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