A $500 Milestone for Google Believers
"When Google's shares nearly doubled in the first few months after its initial public offering, Mark Mahaney decided it was time for his clients to take advantage of the fervor that had built up around the company. He advised them to sell Google shares and put the money into Yahoo.
''I thought the stock was a little expensive,'' said Mr. Mahaney, an analyst then for American Technology Research and now for Citigroup. ''It turns out that was a terrible call.''
So by the beginning of 2005, Mr. Mahaney jumped on the Google bandwagon. And so have most of Wall Street's analysts, along with the portfolio managers who look after big pension and mutual funds.
Yesterday, Google's shares closed at $509.65, up $14.60, passing the $500 mark for the first time. (Mr. Mahaney, who made his sell recommendation at $137, is now among those predicting that Google shares will rise to $600 within a year.)
Not bad for a company that was forced to reduce its initial offering price to $85 a little more than two years ago because of lackluster demand. It quickly confounded the skeptics, rising to $100 on the first day of trading, and reaching closing prices of $200, $300 and $400 all within the course of 2005.
Google now has a market value of $156 billion, exceeding all but 13 American companies -- icons of commerce like Exxon Mobil, Johnson & Johnson and Wal-Mart. It is worth more than any media company and all the technology companies except Microsoft, whose software empire it increasingly threatens, and Cisco Systems.
Google's success has made its founders, Sergey Brin and Larry Page, the 12th- and 13th-richest people in the United States, according to Forbes -- and, at 33, the youngest in the top 400. Their shareholdings are worth more than $15 billion each, on top of the more than $2 billion in cash that each has received for selling some shares.
Yet Google's rise in value and corporate maturity is not just about accomplishment, but about potential. While most companies slow as they grow, Google so far appears to be accelerating.
Its rising stock price has helped it attract the best engineers, minting an untold number of Google millionaires. It has also allowed important acquisitions, most recently a $1.65 billion all-stock deal for the video-sharing site YouTube. And as Google builds a lucrative franchise in selling advertising all across the Web, it makes more money, invests more and keeps the cycle going.
Anthony Noto, an analyst with Goldman Sachs, calls this a ''flywheel.''
''They can reinvest at a faster rate; they can innovate at a faster rate; they can create value for advertisers and users at a faster rate,'' he said.
The company is spending money as if it doesn't expect this growth to stop. Since its offering, Google has quadrupled its staff, to more than 9,000 employees -- many with doctorates from the world's leading universities -- and it is hiring more than 100 people a week to fill three dozen or so offices in more than 20 countries; its headquarters are in Mountain View, Calif., in Silicon Valley. Last year, it received more than a million résumés.
Google is pouring billions of dollars a year into research, computers and a global communications network -- as well as investments in solar energy, a new campus at a decommissioned naval air station, and an army of private chefs cooking free meals from organic produce and hormone-free meat.
Not everything Google touches has turned to gold. Its homegrown video service, chat software and financial information section lag behind those of popular rivals. It has found itself a magnet for legal threats and, in some cases, lawsuits as it moves aggressively to make a growing body of content searchable online. And some have expressed concern about the volume of personal data it is accumulating about its users.
Still, as Google starts to dabble in all sorts of markets, ranging from wireless Internet access to corporate software, it has become in many ways the center of gravity for the technology industries.
''It feels in many ways like competing with Microsoft in the '90s,'' said Jim Breyer, a venture capitalist with Accel Partners. ''In a number of investments, if we are not at the top of our game, we will lose share to Google. Or Google will buy someone who will compete effectively.''
Hanging over all of this, of course, is the specter of the Internet boom and then the bust six years ago, and the paper wealth it created and destroyed. Some see traces of that era's outsize expectations, if not delusions, in Google's ascent.
After all, a company called Amazon.com was once going to change the world. Its shares split three times in the late 1990s before reaching a high of $113 at the turn of the millennium -- only to fall to single digits within two years. (They have worked their way back above $40.)
But there are big differences. Google's rise is not a result of a general rapture with technology stocks or even the search-engine category. Indeed, while Google's stock price has risen almost 50 percent since late March, the shares of its main competitor, Yahoo, have declined nearly 14 percent.
Yet that does not settle the matter. Geoffrey A. Moore, a Silicon Valley marketing consultant and author of books on investing in technology stocks, argues that investors' fascination with Google will inevitably wear off and its shares will plummet like so many highfliers before it.
''Google has had a spectacular early run,'' he said. ''The notion that this is a different animal is never the right argument.'' He suggested that if Google's business hit an unexpected slowdown, the company could meet the same fate.
''People will say, How did we ever believe that stuff?'' he said. Instead of admiring Google's practice of allowing its engineers to spend 20 percent of their time on personal projects, investors will start complaining that the company would be ''only getting 80 percent productivity out of its work force.''
For now, Mr. Moore is very much in the minority. Many of those analysts who do not think Google shares will rise further express confidence that the current value is justified.
''I do not think there is a bubble about to burst -- not even close,'' said Benjamin Schachter, an analyst with UBS Securities, who has rated the shares hold all year. He says the stock should trade at $500 a year from now. His concerns are that the growth of Internet searching and text ads will slow and the prospects for Google's expansion into video ads and other markets have not been proved.
But ''over the long term, Google continues to outmaneuver all of its competitors,'' he said. ''I think it is one of the most important companies on the planet.''
And by some measures, Google's stock price is not as steep as some stocks were at the turn of the millennium. Google's market value today, at $156 billion, is marginally higher than the $150 billion Yahoo reached in January 2000. That year Yahoo earned a profit of only $71 million on sales of $1.1 billion; Google, in contrast, is expected to record a profit of $2.8 billion this year on gross revenue of $10 billion.
As with any highflying stock, though, a few investors are actively betting on a reversal of fortune. Fred Hickey, who writes the High-Tech Strategist newsletter from his home in Nashua, N.H., says that Google's shares are sharply overvalued and will fall as investors notice that the company's rapid growth is slowing.
He points out that its revenue increased 11 percent from the second quarter to the third quarter -- a brisk pace, to be sure, but a lot less than the 18 percent pace in the corresponding time a year earlier.
''Google showed the sharpest revenue slowdown I've seen,'' he said, ''and nobody has paid attention.'' He argued further that the company's expenses are ''out of control,'' and that if the economy headed into a recession, Google's revenue would falter and its profits plummet.
''Google will suffer the same fate that Yahoo did in 2000,'' he said.
Mr. Hickey has put his money where his mouth is: he sold Google shares short, a bet that the stock price will decline. But not much: the short position is just 50 shares.
''I just wanted to be able to say I was short Google when it blew up,'' he said.
Correction:  November 28, 2006, Tuesday  A chart in Business Day on Wednesday with an article about Google's share price surpassing $500 misstated the performance of New River Pharmaceuticals, which was listed among the best-performing initial offers. Shares of New River increased 1,154 percent through Tuesday since its offering in August 2004, not 527 percent. In addition, two companies listed in the chart, New River and Atlas America, did not reflect the split-adjusted share prices. The split-adjusted price for New River was $4, not $8; and for Atlas America, it was $10.33 instead of $15.50."