Caution Surrounds New Google Stock Price Projection

By Vandana Sinha
January 6, 2006 02:54 PM

This time a decade ago, some business reporters acted like proud parents on graduation day when writing about technology companies and their stock prices, unable to keep the congratulations out of their copy.

This week, however, after an analyst prophesied Google Inc. would end 2006 with a $600 stock price, the reporters' choice of words leaned more toward "aggressive" and "ever-loftier" and "hype" and "frenzy." One could practically see twice-shy tech reporters furrowing their eyebrows in disbelief nationwide.

A day after New Year's Day, Piper Jaffray analyst Safa Rashtchy proposed that Google's share price would leap from $414.86 to $600 in 12 months. That's a 45 percent rise in price - and seven times the $85 that Google began trading at in its initial public offering five months ago.

While many reporters said that prediction mirrored others on Wall Street, and was not impossible given Google's growth and ability to earn actual revenue, they still pointed out the possible villains in this stock market fairy tale.

" If Wall Street has a weakness, it's the assumption that a company that has the momentum that Google has, that it will continue. And there will be no missteps," says Robert Walberg, an analyst for MSN/CNBC whose latest Street Patrol column on MSN Money boasted the headline, "Google at $600? Time to sell."

"Now, Google is set up for kind of a fall," he says.

Reporters have learned the strength of skepticism from the tech bust. Stories didn't hesitate this time to reveal the risks that Google would likely face this year that may slow growth.

Walberg, for one, points out that the mega-company hasn't yet filed its final end-of-fiscal-year earnings yet, making Piper Jaffray's end-of-2006 estimate an even tougher call.

"There's a sensationalism about that that risks the credibility of analysts," he says. "It's very difficult to forecast six months forward, as opposed to 24 months forward."

In its story, MarketWatch.com reminds readers about an analyst's price target for Yahoo - a familiar $600. That was before the bubble burst. "It was a bold call that Yahoo Inc. never reached," according to the story. "Nonetheless, it was a headline grabber."

Jonathan Berr, a senior writer for TheStreet.com, quotes another analyst who says Google and AOL's partnership hasn't yet bore any fruit and rates the search engine firm's stock as a mere "neutral." His colleague, Kevin Kelleher, played out the "analytical tug of war" in a four-case scenario that either sets Google bullishly roaring ahead with advertising on mobile devices, or bearishly behind as an oversupply of stocks ends in volatile prices.

At least two business reporters had the opposite forecast from Piper Jaffrey before 2005 closed. Columnists from the San Jose Mercury News and Fortune magazine said Google won't be able to sustain its growth this year.

At BusinessWeek Online, writer Ben Elgin asks investors and analysts to "hold on a minute," as he highlights Google's "deep-pocketed competitors" in Microsoft and Yahoo and its over-reliance on online advertising, which could be nearing its own ceiling now.

"Our verdict was cautiously upbeat, and the company has since outperformed even the rosiest of expectations. But at what point does Google's stock price go from rich to outlandish?" Elgin asks his readers. "When a company is priced to perfection, its warts deserve closer examination."

Walberg says reporters can call on other analysts, competitors, major advertisers and economic indicators to help dissect those warts. For instance, if a big revenue source for Google is online advertising, which rides the economic roller coaster, he suggests studying the numbers - yield curves, real interest rates, inflation growth, GDP growth. And if Google is looking to enter new industries, then what kind of profit margins are companies already reigning in those markets seeing?

And with furious end-of-the-year trading coming to an end itself, where does that leave Google's stock prices in the start of 2006?

"What is more likely to happen is if Google posts a number that is good, but not sensational, people will start selling," Walberg says. "There's a lot of room for that stock to come down and come down hard."

So far, though, Google is going Piper Jaffray's way. The day after its $600 pronouncement, the company's stock rose 5 percent to close at $435.23. But don't expect business reporters to take even that growth without a grain of salt.

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Copyright © 2008 Donald W. Reynolds National Center for Business Journalism