Fear overtakes greed for Google (GOOG)
It has been a difficult week for our friends Sergey and Larry. Google (GOOG -- click to register for free RT streaming quote) has been taking shots all week and the market now seems to have replaced full-throated optimistic jubilation with soul-deadening pessimism, in relatively short order.
James Stewart, the SmartMoney columnist, wrote last week that he sees Google's depressed share price as very nearly a buying opportunity. After this morning's decline, which is owed almost entirely I think to the current Barron's and Wall Street Journal articles, I'm getting inclined to agree.
Barron's wrote this weekend that the shoals awaiting the good ship Google are becoming more perilous, and that their ability to match performance with expectations is getting more questionable. That's certainly a real possibility, especially for a company growing at this pace that does not provide guidance. They also took Google to task, as did the WSJ this morning, for having some of their quarterly growth come from interest income (following the cash infusion of their huge secondary offering), and having such a high margin business that any fluctuation to the top line moves the bottom line dramatically. The long Barron's article is freely available here if you want to read their whole argument.
I don't think Barron's is pointing out much that is not widely known already -- click fraud, the rule of large numbers, competition, and many other elements could come into play to create a perfect storm that brings Google down to $100.
But that doesn't mean it's likely. We all, as investors in individual stocks, play a game of probabilities -- what are the odds that this company will fail, or succeed ... what are the odds that their products will gain favor, or face scorn? Have the Wall Street bookies taken too much money on one side or the other and tilted the spread too far?
In my opinion, we are all understating the potential growth not only for internet search, but for targeted advertising. While Google's model has many imitators, it has no competitors in online advertising who show any sign of building a better mousetrap at this point. And while Google's competitors try to catch up, Google is expanding their search and targeting capabilities -- video, radio, television, magazines. I think the odds are in favor of Google continuing to keep an edge over their competitors, not least because they are expanding their staff so dramatically and continuing to bring the world's best engineers and programmers into their culture of innovation.
As someone who used to work in direct marketing before my current academic career, I am fully aware that targeting is much more than half the battle in advertising -- the ability to place the right content in front of the right person at the right time is the killer app for marketing. I hope and fully expect that Google's killer app -- which is still really in ints infancy, in my opinion -- will continue to fund a massive Research and Development effort that will in the future make our best prognostications seem foolish in five or ten years.
Of course, "buying opportunity" is not the same as "I put my money on the line". I still own all the Google shares that I bought with an average cost basis just below $200 ... but I haven't bought any more on this decline, and I don't intend to.
Regular readers of my blog and my postings over at ADVFN (register here for free to see those) would note that I've been talking more lately about my caution regarding Google, and about my interest in paring back my outsize GOOG holdings. I still am generally interested in reducing my Google shares to help my portfolio remain well diversified, but I'm not willing to sell them at this price (and I wasn't willing to sell them while I would owe short term capital gains on them).
In general, I'm reluctant to sell stocks that are performing very well or to pay commissions and taxes on gains by trading in and out of stocks to time market movements (even if I could time the market reliably, which I can't) -- unless I can't understand why they're performing and I no longer believe that they have good long term prospects, or unless I see a catalyst in the near future for their decline that hasn't been priced into the stock (for example, a competitor that's growing faster than expected, or a drug nearing the end of it's patent protection).
During my years of investing I have made many mistakes in all kinds of areas, but the most galling mistakes have been in selling too early -- the times when I failed to sell early enough and had to sit through a decline and eventually sold out have been dramatically outnumbered by the times when I sold before several-hundred-percent gains. Patience can hurt, as it has this week with Google -- but in my experience if you're invested in the right companies and understand their business, it's the most renumerative approach.
Google is an amazing company that the Street is having a terrible time attaching a value to. I'm having a hard time too, but the recent decline seems to me to be an overreaction. We'll see.
James Stewart, the SmartMoney columnist, wrote last week that he sees Google's depressed share price as very nearly a buying opportunity. After this morning's decline, which is owed almost entirely I think to the current Barron's and Wall Street Journal articles, I'm getting inclined to agree.
Barron's wrote this weekend that the shoals awaiting the good ship Google are becoming more perilous, and that their ability to match performance with expectations is getting more questionable. That's certainly a real possibility, especially for a company growing at this pace that does not provide guidance. They also took Google to task, as did the WSJ this morning, for having some of their quarterly growth come from interest income (following the cash infusion of their huge secondary offering), and having such a high margin business that any fluctuation to the top line moves the bottom line dramatically. The long Barron's article is freely available here if you want to read their whole argument.
I don't think Barron's is pointing out much that is not widely known already -- click fraud, the rule of large numbers, competition, and many other elements could come into play to create a perfect storm that brings Google down to $100.
But that doesn't mean it's likely. We all, as investors in individual stocks, play a game of probabilities -- what are the odds that this company will fail, or succeed ... what are the odds that their products will gain favor, or face scorn? Have the Wall Street bookies taken too much money on one side or the other and tilted the spread too far?
In my opinion, we are all understating the potential growth not only for internet search, but for targeted advertising. While Google's model has many imitators, it has no competitors in online advertising who show any sign of building a better mousetrap at this point. And while Google's competitors try to catch up, Google is expanding their search and targeting capabilities -- video, radio, television, magazines. I think the odds are in favor of Google continuing to keep an edge over their competitors, not least because they are expanding their staff so dramatically and continuing to bring the world's best engineers and programmers into their culture of innovation.
As someone who used to work in direct marketing before my current academic career, I am fully aware that targeting is much more than half the battle in advertising -- the ability to place the right content in front of the right person at the right time is the killer app for marketing. I hope and fully expect that Google's killer app -- which is still really in ints infancy, in my opinion -- will continue to fund a massive Research and Development effort that will in the future make our best prognostications seem foolish in five or ten years.
Of course, "buying opportunity" is not the same as "I put my money on the line". I still own all the Google shares that I bought with an average cost basis just below $200 ... but I haven't bought any more on this decline, and I don't intend to.
Regular readers of my blog and my postings over at ADVFN (register here for free to see those) would note that I've been talking more lately about my caution regarding Google, and about my interest in paring back my outsize GOOG holdings. I still am generally interested in reducing my Google shares to help my portfolio remain well diversified, but I'm not willing to sell them at this price (and I wasn't willing to sell them while I would owe short term capital gains on them).
In general, I'm reluctant to sell stocks that are performing very well or to pay commissions and taxes on gains by trading in and out of stocks to time market movements (even if I could time the market reliably, which I can't) -- unless I can't understand why they're performing and I no longer believe that they have good long term prospects, or unless I see a catalyst in the near future for their decline that hasn't been priced into the stock (for example, a competitor that's growing faster than expected, or a drug nearing the end of it's patent protection).
During my years of investing I have made many mistakes in all kinds of areas, but the most galling mistakes have been in selling too early -- the times when I failed to sell early enough and had to sit through a decline and eventually sold out have been dramatically outnumbered by the times when I sold before several-hundred-percent gains. Patience can hurt, as it has this week with Google -- but in my experience if you're invested in the right companies and understand their business, it's the most renumerative approach.
Google is an amazing company that the Street is having a terrible time attaching a value to. I'm having a hard time too, but the recent decline seems to me to be an overreaction. We'll see.
Labels: GOOG
This article posted by One Guy @ 2/13/2006 11:43:00 AM 0 comments
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