Google: A Year After The Wall St. Journal's Cover Story

Many of you may recall that I was featured on the front page of the Wall Street Journal last year for a story discussing the investment merits of Internet search giant Google (GOOG). In fact, some of you may have even discovered my blog directly as a result of that article. At the time I was writing a lot about the company and fortunately, some Wall Street reporters took notice.

Whenever the article is brought up, the most common question I get, perhaps quite predictably, is, "Well, who was right?" Here we are one year since that article ran, so let's reflect on how things have taken shape for the stock since then and see exactly who was right.

To summarize, the article was called "As Google Matures, Investors Take Closer Look at Its Risks." The other investor interviewed for the story was David Gordon, who also happens to be an avid stock market blogger (The Deipnosophist). Both of us were early investors in Google, but I decided to take my profits and move on to other stocks, whereas David was buying on dips and holding for the long term.

I had sold one chunk of Google at $467 in January of 2006, and followed that up by selling the rest of it in February around $400 per share. My logic was that I had a huge gain (after paying around $180 originally) and felt that many of the positive surprises surrounding Google's search business had already been reflected in the stock. To diversify, the company began spending lots of money hiring people and investing in new services as well as overseas expansion. To me, the easy money had been made and there was less certainty that the company's other ventures would be as successful.

On the other hand, Mr. Gordon was confident that Google would be successful growing its model across other segments of the market. Despite the short term fluctuations in the stock, he did not sell any of his shares. Instead, he was quoted as saying "months from now, it will be at $600 to $800 a share and people will say, 'My God, why didn't I buy it back then?' "

As you can see from the chart below, Google has been very volatile over the last year. The shares dropped from $376 to $330, hit $450, dropped to $350, soared to more than $500, and now trade at $448 each.

So, who was right about Google? It really depends on how you define "right." If you just look at the stock price since the article came out, Google is up 19% since then, giving David the nod. However, if you look at his prediction of $600 to $800 per share in a matter of months, though, he wasn't. It's been a year and the stock traded over $500 but only for a brief time.

From my perspective, I sold some stock at $467 and some at $400, for an average sale price of $417 per share. More than a year later the stock still only trades at $448 per share. It has only risen about seven percent from my average sale price, during a time when the S&P 500 has risen by about 10 percent. For me, selling Google when I did paid off, as the stock has underperformed the market since then.

From David's prospective, Google might not have hit $600 or $800 like he had hoped for, but he did not sell it, and the stock has risen nearly 20% in a year. In hindsight, it is true that his optimism was excessive, but the stock has gone up. We can hardly call that being wrong.

So, as much as some might want to crown a winner in what the Wall Street Journal called "A Tale of Two Shareholders," we might just have to conclude that given our personal objectives, we were both right. To support that claim, I'd be willing to bet that having it to do all over again, we both would have done the exact same thing.

GOOG 1-yr chart

Comments

[Andrew Schmitt:]

No BS Belly button staring. You are either right or wrong. You were wrong.

2007 Mar 02 09:33 AM

[Chad Brand:]

So you are saying I should have not sold GOOG but rather kept it while it underperformed the S&P 500? Hardly a way to generate superior investment returns. I prefer to outperform, but maybe that's just me.

2007 Mar 02 11:42 AM

[akindman:]

So your only options were to sell at $400 or hold until this instant?

2007 Mar 02 12:47 PM

[Chad Brand:]

Of course there are many other possible scenarios. I could have sold it at $330, or at $510, or at any other price in between. However, I can't speculate as to when/if I would have sold later if I chose to hold my stock, because it's unknowable.

Nothing fundamentally has changed with Google over the last year... they are still going into new markets, spending a lot of money to do so, and hoping to cash in on those other businesses as well as overseas. So, if I didn't sell for the reasons I did, I probably would have held the entire time like Mr. Gordon did.

The point is, since I sold my stock, Google has underperformed the market, so doing so has helped my returns. Long term holders like Mr. Gordon have also done well, as the stock has risen nearly 20% in the last year. So, both camps are happy. That was the point of the piece.

2007 Mar 02 01:31 PM

[Anand Krish...:]

Sounds like Multiple compression is happening for GOOG, even though the company continues chugging on with its new product development. Where do you expect the long term equilibrium P/E multiple for GOOG given it is capable of growing earnings at 20-25% in the long run?

Is there a prefered entry point, if so why?

2007 Mar 02 04:31 PM

[Chad Brand:]

Given the market swoon lately, that really is the question to be asking now that the stock is under $440 per share.

Current estimates are for earnings growth in 2007, 2008, and 2009 to be 35%, 29%, and 25%, respectively. Given that Google's margins will contract over time as it enters lower margin businesses, sales will have to grow by 40%, 35%, and 30% over the next 3 years just for them to hit those numbers.

Personally, I'm not willing to pay a high multiple for a stock with such high expectations built into the shares. There is very little room for upside, in my view. The most I would be willing to pay would be 30 times 2007 numbers, which comes to around $425 per share.

Paying more than that would require more confidence that 1) current growth projections are likely, and 2) they might even have decent upside to them. With 30 to 40 percent sales growth baked in for the next 3 years (which is an eternity in tech land) it is not going to be a piece of cask for the company to meet or exceed current expectations.

So that's my two cents.

2007 Mar 02 05:18 PM

[Sufiy:]

Google TA double top reversal confirmed


sufiy.blogspot.com/200...

2007 Mar 04 05:49 PM