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Sell Google

Email|Print|Single Page| Text size + By Steven Syre
Globe Columnist / October 26, 2004

Among the 20 stock analysts who follow the fortunes of Google Inc., only one lonely researcher suggests selling the shares. I would join him.

Google shares are running like the bulls in Pamplona at the moment. The stock, which went public at $85 per share in August, climbed another $14.97 yesterday to finish at $187.40. Google shares have soared about 23 percent over the past three trading days, driven by the company's admittedly outstanding quarterly financial report last week.

Long-term investors may find themselves very pleased with their Google holdings in future years. Google shares are about twice as expensive as the average Nasdaq stock, and they may be backed by a powerful enough growth story to deserve it. Maybe, but that's not the point.

Google is a volatile stock right now, susceptible to a tumble in the more immediate future. Here are four reasons why:

The time-capsule factor. I read a story anticipating Google's quarterly report last week and came across upbeat comments by Mary Meeker from Morgan Stanley. Remember her? She was one of the most influential cheerleaders of the Internet bubble, and I experienced a jolt of dj vu as soon as I read her comments about Google's quarterly report (which turned out to be right).

My Meeker moment was no isolated phenomenon. Soon, other analysts were tripping over one another to bump up their stock-price estimates. A few went straight to a $200 target. Ring any bells? An element of stock market giddiness is back. It just happens to be limited to one stock.

The limited float. Google sold a very small percentage of its stock to the public two months ago in its IPO, an offering of 19.6 million shares. Since then, Fidelity Investments has purchased 5.2 million shares and Legg Mason's Bill Miller bought another 3 million. Now how many shares are available in the market?

Scarcity drives the price of a stock higher. It's impossible to say how much a small float affects a hot stock. But it's an undeniable factor, especially when a company is the focus of this much attention.

The expiring lock-ups. Stock owned by Google insiders could turn that supply-and-demand situation upside down. Millions of insider shares, restricted from trading at the time of the IPO, could be sold soon. The so-called lock-ups restricting those shares are scheduled to expire in stages. The first took place last month and the next one, coming next month, will permit another 39.1 million shares to be sold. The entire process will be done by February.

Just because stock can be sold doesn't mean it will be. No one has a clue how many additional Google shares will start to trade in the public market.

But many insiders are sitting on huge paper profits, and it's very likely they will sell at least some of their holdings.

Competition. Google is very profitable and growing quickly. But it faces real competition with smarts and money. Never mind Yahoo for the moment. Microsoft Corp. is expected to launch its entry into the search-engine business soon, probably by the end of the year.

Google has plenty of things going for it, including the best product, brand loyalty, and lots of money. But heavyweight competition could put a dent in the rapid growth rates Google needs to maintain to support its stock price. Merely good news won't be good enough in the search-engine competition.

Wall Street loves to tells a story. It has no business if there's no story to tell. And Google is the story it's telling today.

In fact, everyone likes the Google story. But the real question is about price and, just a few weeks ago, it still made sense. Now, I'd bet the other way.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.

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