One more securities analyst recommends to sell Google

October 12, 2004

Another securities analyst downgraded his rating on Google from hold to sell Monday.

Not surprisingly, he wasn't from one of the investment banks that underwrote the deal.

Despite all the reforms intended to separate research from investment banking, it seems Wall Street analysts are still unlikely to slap sell signals on companies their employers take public.

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So far, analysts from five of the firms that underwrote the Google IPO have issued "buy" or equivalent ratings on Google and two rate it hold or neutral. None has a sell on the stock.

Among non-underwriting firms, the opinions are more widely dispersed: Three rate Google a buy, seven rate it hold/neutral and four recommend selling the stock, according to data from Bloomberg and Thomson Financial via Starmine.

The latest sell recommendation came Monday from Mark Mahaney of American Technology Research in San Francisco, who questioned whether Google's earnings for the quarter that ended in September will be strong enough to meet "what we believe may now be overly aggressive expectations."

On Monday, the stock fell $2.47 per share to $135.26. Mahaney writes that Google's share price rally -- it is up almost 60 percent since it premiered at $85 -- leaves it trading "at no material discount" to Yahoo, "and we believe a discount is warranted."

He also says new search technologies from Snap (an Idealab company) and Yahoo Local "highlight how competitive and dynamic the online search landscape is."

Finally, Mahaney says there are signs that Google is becoming "increasingly momentum driven," which means "there may not be near-term support for the stock on any correction."

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Last Tuesday, Google stock jumped 2.5 percent on nothing more than Legg Mason's disclosure that it owned 4.3 million shares, or almost 13 percent of Google's stock.

"The skeptical translation is that somebody bought at $135 on the news that Legg Mason bought at $85. Sounds like fast-money to us," Mahaney writes.

About 2 million of Legg Mason's Google shares are in its flagship Value fund, run by noted manager Bill Miller. He is one of the few value-fund managers who have invested in Internet stocks such as Amazon.com.

Legg Mason is Google's second-largest outside shareholder after Fidelity, which owns about 15 percent of its Class A shares.

Fidelity Growth Company Fund, because it holds more than 5 percent of Google, had to disclose that it owns about 1.8 million shares, but Fidelity has not said where the rest of its Google shares reside. That news will trickle out slowly. Fidelity's funds disclose their entire portfolios about 60 days after the end of their fiscal quarters, which vary by fund.

Some of the major investment banks involved in the IPO -- such as Deutsche Bank Securities; Goldman, Sachs; and Piper Jaffray -- have yet to rate Google.

Analysts from underwriting firms couldn't comment on Google shares until late September, by which time they were at $118.

It's possible that some analysts who wanted to slap a buy on it at $85 or $110 "got jammed, like a batter with an inside pitch," says Mahaney. "Now, to have a buy, you have to argue why it should be worth $150 or $160. It's hard to make that argument," he adds.

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But if they wait for a correction, they may be able to rate it a buy.

In other words, don't hold your breath waiting for Google's underwriting firms to issue sells.

The firms that have rated Google a sell include Mahaney's, which does brokerage but no investment banking; Janco, which does both; Soleil Securities, which distributes research produced by independent analysts and boutiques; and Spelman Research, which publishes research for which the rated company has paid a fee and research that has not been paid for.

Google did not pay for its rating, says Spelman President Guy Cohen.

Source: SF Gate.com

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