February 28, 2006
Google Tumbles Again
Posted by Gordon Smith

Way back in the spring of 2004, before Google went public, I questioned whether the company had staying power because it relied exclusively on internet advertising for revenues. Google proceeded to complete a successful IPO and followed with one quarter after another of startling successes, resulting in an outrageous stock valuation. I have been the first to admit my surprise.

Is it possible that the chickens are finally coming home to roost?

Starting in January, Google's stock began sliding. First there was the Barron's article that said Google could lose half of its value over the next year. Then Google missed is quarterly earnings numbers. This was dismissed as a tax-induced blip, but as people dug deeper, some have concluded that Google is a very cool company without many revenue options. The price of the stock declined by almost $100.

Over the past fortnight, the stock has regained some of that lost ground, but today Google CFO George Reyes said essentially what I was saying two years ago: Google needs to find some new sources of revenue. Google's shares tumbled and are now down over $27 on the day.

Analysts are holding firm, stating that there was nothing new in Reyes' statement. They had the same reaction to the Barron's article. If you subscribe to the W$J, check this out. All of the analysts surveyed on February 1 were pegging Google's price target at more than $400 per share, and half of them were estimating something over $500 per share. The current price is in the $360s.

Now, Google is telling a growth story that relies on something other than search revenues:

Mr. Reyes said the new products Google has been introducing at a furious pace recently will produce "meaningful" revenue contributions in the future. The mobile and local arenas, in particular, offer "a lot of opportunity," he said.

Google will continue to invest heavily in the quality of its search engine and new products, he added, and this will continue to drive a "virtuous circle" whereby product strength causes rising traffic, which attracts more advertisers and generates higher revenue.

"There's been a huge acceleration in the level of innovation in the company," he said. "It's all about risk taking."

Do you believe in the "virtuous circle"? This sounds more like a startup pitch than a market leader: upward spiraling revenues from unproven (or unreleased) products ...

I am still a skeptic.

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