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Google: Misery loves Company

Posted February 28, 2008

“Google’s recent drop in share price can be blamed on many factors, but there is no doubt as to what it signals. Google has moved from the high-flying world of growth stocks, to the boring, slow-moving universe of value stocks. ” – Andrew Snyder

By Andrew Snyder

Baltimore (TFN) – Imagine losing eight billion bucks and still being filthy rich. That is what happened to Google (GOOG:NASDAQ) founders Sergey Brin and Larry Page.

When shares of their company hit an all-time high of $7474 last fall, their holdings were worth just over $21 billion each. Today, with shares selling for just $473, their positions are worth a paltry $13 billion.

Fortunately, I don’t think the two billionaires will be forced to tap into their 401(k) savings anytime soon.

There has been a host of problems impacting Google’s share price. A weakening economy, the law of diminishing returns, competition, even technical factors have all weighed heavily on the company. Microsoft’s recent grab at Yahoo created an industry stir, but one of the latest worries is the marked drop in “paid clicks,” one of Google’s most lucrative revenue streams.

To web-industry experts, this drop should not have been a surprise. The Internet marketing industry is constantly evolving. Just look at the come-and-go success of the leading sites. Each year, a brand new site is the king of Internet hype. Web marketing is no different.

Pay-per-click advertisements were highly popular over the last two years. The allowed marketers a concentrated stream of viewers, targeted directly at their product or services. When fresh to the market, it was a great source of potential buyers. But now that the medium has matured, competitors have caught up, and consumers have caught on, the tool is not so lucrative to advertisers. They have moved on to the next tool in the web arsenal, creating an extremely broad web presence. More on that subject some other time.

Historic shift

Google’s recent drop in share price can be blamed on many factors, but there is no doubt as to what it signals. Google has moved from the high-flying world of growth stocks, to the boring, slow-moving universe of value stocks. No longer will the company’s value soar because of a new product release or an entry into a new market. Google is too old for that stuff. It has entered its mature stage in the business cycle and there is nothing Sergey and Larry can do about it.

As an investor, this maturation is not a bad thing. The market simply needed to adjust the way it views the stock. It did exactly that by shaving nearly $300 of the share price.

You should be ready to buy

Now that Google is in the value universe, investors need to concentrate on buying low and selling high. The valuation ratios that were so out of whack when Google was soaring are coming back in line with traditional value measures. That makes the job of an investor much easier. Buy when those ratios look cheap. Sell when they are not.

Now that Google has grown up, it is no different than any other company. Currently, the company’s valuations are looking pretty appealing. Smart investors are taking a very close look at the stock. If share price drops below $450, we will see a big surge in buying activity.

Keep a close eye on this value play.

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Posted by Andrew Snyder · Filed Under US Stocks and Markets 

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