Google This: The Right Price


Google This: The Right Price

It brings back memories of the dot-com boom and bust. What\'s different this time? Real growth and honest profits.

Scott Kessler has followed Internet companies as an investment analyst at Standard & Poor's since 1998. His rating on Google: Hold.

What's up with Google? The stock (symbol GOOG) started trading at $85 a share in August 2004 and recently hit $415. Is the run-up justified? Google did an excellent job delivering growth and financial performance. Earnings will grow an annualized 40% for the next five years. Its revenues from Internet search ads are eye-popping, approaching $10 billion this year. Yet the ratio of Google's stock price to its earnings growth rate is 1.3. That's cheaper than the tech average and the overall market.

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So the stock's a bargain? No. I'm not telling people to sell the shares, but I'm not recommending them either. In 2006 and 2007, competitive issues will start to have an impact on the company's growth prospects and profit margins. A year ago Google had one decent competitor, Yahoo. Fast forward one year. You've now got a formidable competitor in Yahoo, focused and aggressive competition from Microsoft, and a wild card in Ask Jeeves, recently acquired by IAC/InterActive. I don't think a lot of people appreciate that Google is not diversified in terms of revenues.

Are there lessons we're missing from the dot-com disaster? This stock embodies a lot of strong emotions. Momentum players, who pile in when prices are rising and sell when prices reverse, are getting into Google. Wall Street analysts are by and large very bullish. All this is reminiscent of five years ago, just before the bear market. The obvious distinction is that Google is a profitable, ongoing operation. But when any stock goes from $85 to $415, prudence dictates that you take some money off the table. One of the lessons of the dot-com era is that prudence, more than patience, is a virtue.


Are there Internet stocks you like better? A few weeks ago I would have recommended Yahoo, but its price is no longer reasonable. We see better value in some small and midsize companies, such as IAC/InterActive (IACI). Besides Ask Jeeves, its brands include Home Shopping Network, LendingTree and We also like RealNetworks (RNWK), a bear-market survivor and a leading provider of subscription music and games.