Google's auction-style initial public offering worked well for Alex Free. He landed 44 shares at the IPO price of $85. They later settled at $105, a quick 24 percent return. But the 30-year-old from Mount Vernon, Wash., says if the stock drops below the IPO price, as he suspects it might, "I will treat it as a buying opportunity."
That's a smart strategy if you're considering investing in the popular Internet-search firm. Although Google appears to have a dazzling future, the short term is problematic. Google is, after all, a young company prone to mistakes — it was way off base on its original IPO price estimate of $108 to $135. It also derives virtually all its revenues from a single, hotly contested business: advertising linked to Internet searches.
"Right now, paid search looks great," says analyst Martin Pyykkonen, of investment bank Janco Partners. "But you don't want to have all your eggs in one basket."
Like Google, the online-advertising market is young and full of promise. S.G. Cowen analyst Jim Friedland estimates that the global paid-search market will grow 38 percent annually over the next five years and that Google's revenues — $1.5 billion last year — will grow at a similar pace. Google's worldwide share of paid search is about 29 percent, well ahead of rival Yahoo's 12 percent. Google is also testing some new services, including e-mail and comparison shopping.
One short-term downside is a potential flood of additional Google shares on the market. In coming months, as many as 270 million shares will be free of restrictions from insider sales — Google sold only 20 million shares in its IPO.
Given Google's youth and its still-developing business model, pinning a value on the stock is no easy task. Janco's Pyykkonen rates the stock a sell, with a one-year target of $76. But analyst Youssef Squali, of investment bank Jefferies, values the shares at $115 and rates them a buy. The divergence stems mainly from different assessments of Google's growth rate and the risks of its business.
If Google and the online-advertising market live up to their potential, in a few years the difference between the estimates may be nothing more than a historical footnote. But in the short run, the rise in share count is likely to keep a lid on share price. Investors may want to wait until mid-February, when the final chunk of 177 million shares can be sold.