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Allan Sloan

IPO's Success Doesn't Justify Google's Price

By Allan Sloan
Tuesday, August 24, 2004; Page E03

One of the tongue-in-cheek rules that we column-writers have is, "Often wrong, never in doubt." Take a stand, don't duck and weave too much. But someone as opinionated as I am should not only have no doubt, but shouldn't be wrong too often. No one's perfect, though. As witness the column I wrote three weeks ago as I headed for vacation, warning you not to buy Google at its initial public offering price.

Oh, well. I'm back from the beach and it's clear that my advice turned out to be wrong. If you disregarded my opinion and bought Google at its $85 IPO price, you're sitting pretty, given that the stock has never traded below $95 and closed Monday at $109.40. Heck, if I'd known that was going to happen, I'd have hocked myself to the eyeballs, bought the IPO, taken a quick $20-a-share profit and used it to buy a beach house that I'd have named Never In Doubt.

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_____Markets_____
Track Google's Stock: GOOG
_____Google In The News_____
Google Not The First To Go Dutch (The Washington Post, Aug 23, 2004)
Google Faces Challenge of Public Company Status (The Washington Post, Aug 21, 2004)
Investors Greet Google With a $27 Billion Smile (The Washington Post, Aug 20, 2004)
Complete Coverage: Google

Of course, at the time I wrote that column, Google's projected price range was $108 to $135 a share, the offering was set at 24.6 million shares and the company said it would use a Dutch auction to price the IPO. Such an auction lets potential buyers say what they're willing to pay and sets the price at the point where there are enough buyers to buy all the shares being offered. That's designed to make sure that sellers aren't settling for a way-below-market price and IPO buyers aren't getting a windfall.

But everything changed while I was recreating. Google cut its price to $85, trimmed 5 million shares from the offering and -- most important -- seems to have set the price artificially low to ensure a quick run-up. Instead of a true Dutch auction, which would probably have produced an IPO price of $95 to $100, Google sold at $85 and gave successful bidders only about 74 percent of the shares they sought. This created pent-up demand -- clearly what started the price running.

Sorry to have been wrong -- but that's what happens when I depart from my customary skepticism and trust people I don't know. I thought the guys running Google were serious about not wanting to manipulate their stock price. Oops. As they say in pro sports, my bad.

But now that the price is above the original minimum price range, I'm not in doubt. So I'll repeat what I said three weeks ago. This price is insane. And anyone buying Google as a long-term investment at $109.40 will lose money. (If you're buying Google to trade, assuming a greater fool will pay more than you did, you may do just fine. But I wouldn't wait too long to sell.) This has nothing to do with Google as a company: It's nicely profitable; I love the product. It has to do with math and with limiting factors -- fancy language for the old truism that no tree grows to the sky.

At Monday's closing price, the stock market is valuing Google at almost $30 billion, or almost 87 times the $1.26 per-share profit it reported for the 12 months ended June 30. Google earned $7 million on $86 million in revenue in 2001, its first profitable year, and $191 million on revenue of $2.26 billion in the 12 months ended June 30. But the company's not a small start-up anymore. To keep up this growth rate, Google will have to earn $5 billion on revenue of $60 billion in 2006. That's clearly not going to happen.

One of the few Internet companies in which investors have made out well buying after an IPO run-up was Yahoo, which Wall Street and the company designed as a typical IPO with an artificially low price designed to produce huge first-day profits for buyers favored by Yahoo and the Street. The IPO sold for $13 a share, ran as high as $43 its first day, and closed at $33. (Adjusted for subsequent stock splits, the numbers are 54 cents, $1.79 and $1.38.) But Yahoo's stock market value at the end of its first day was only around $850 million. I thought that was madness -- but the company has proved to be a survivor and had room to grow into its stock price. Google doesn't.

So I'll say it again. If you're looking at the long term, don't buy Google at this price. Wait; it will get cheaper. Sure, I was wrong about the IPO price -- but at $109.40 a share, I have no doubt whatever that betting on a price fall by selling Google short is a heckuva lot better bet than buying at this price.

Sloan is Newsweek's Wall Street editor. His e-mail address is sloan@panix.com.


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