Tech Stocks' Latest Boom Hits Backlash

By Yuki Noguchi and Ben White
Washington Post Staff Writers
Thursday, January 19, 2006

Skepticism is growing over highflying tech stocks like Google Inc.

The stock price has soared in the past year, boosted by cutting-edge software and an enormous consumer following that some say could raise the share price to $600. But a chorus of naysayers is emerging, including former Internet stock enthusiast Henry M. Blodget, who this month called the stock a potential loser whose future value could plummet to a quarter of its current $445-a-share price.

"Google's major weakness is that it is almost entirely dependent on one, high-margin revenue stream" in the form of online advertising, Blodget wrote on his blog, Internet Outsider. "I'm just laying out a scenario that could kneecap Google and take its stock to, say, $100 a share."

Blodget is an icon of the rise and fall of Internet stocks in the 1990s, having helped his employer at the time, Merrill Lynch & Co., earn big banking fees by publicly praising stocks that he privately called "crap" and "junk." Blodget paid a $4 million fine and was barred for life from working as an analyst for a registered investment advisory firm, though he can still post his opinion online.

Yesterday, as investors administered a beating to shares of eBay Inc., Apple Computer Inc., Yahoo Inc. and Intel Corp. for reporting lower-than-expected financial results this week, Blodget's now-contrarian point of view on technology appeared to gather some traction.

Shares of Yahoo fell more than 12 percent yesterday, closing at $35.18. Intel shares dropped 11 percent, closing at $22.60. Google has said it will announce its first-quarter results at the end of the month, but its stock was down 4.75 percent.

Blodget's comments this month about click fraud (the practice of clicking on ads simply to make them appear more popular and boost revenue) and the lack of revenue diversity at Google broke little fresh ground, said Martin Pyykkonen, an analyst who covers Google for brokerage firm Hoefer & Arnett Inc. and who rates the stock "buy." But he said that investors took special note of the column because of Blodget's well-known familiarity with highly valued technology stocks.

"He didn't really say anything new," Pyykkonen said. "But since it was Blodget, I've now heard about it from our sales force and they've heard about it from clients. It's kind of a viral spreading of the word."

Philip Remek, an analyst with Guzman & Co., said that by traditional cash-flow and price-to-earnings measures, all four big Internet companies -- Google, Yahoo, eBay and Inc. -- will "underperform." Such companies may post 40 percent growth rates this year, but that is not sustainable over the long term, he said.

"There's too much enthusiasm," Remek said. "Even if growth is phenomenal this year, will it be phenomenal next year or two years from now?"

Google this week announced the purchase of a radio-advertising company, and it recently launched a series of mobile, video and other software services, but it depends on online advertising for nearly all of its revenue.

Remek also noted that much of what Google has to offer comes free. "I think there's a lot of hype and speculation about where Google's revenue will come from," he said.

Blodget said his turnabout on Internet stocks came from his own reckoning with the 1990s bubble.

"Having now lived through a full boom and bust cycle, I do think I have some perspective that I lacked in the '90s -- namely, an appreciation for how quickly we can go from nirvana to hell," Blodget wrote in an e-mail responding to a reporter's questions. "One thing we all learned the hard way in 1999 is that, when the consensus gets too rosy, we're primed for a fall. And the Google consensus was getting pretty rosy," said Blodget, now president of industry research firm Cherry Hill Research and an occasional contributor to the online magazine Slate, which is owned by The Washington Post Co.

Blodget, once the muse of Wall Street whose prognostications earned him $12 million a year, was a key figure in a 2002 investigation by New York state Attorney General Eliot L. Spitzer, who disclosed internal Merrill Lynch e-mails implying that Blodget publicly recommended stocks while privately dismissing them. The next year, 10 large Wall Street firms settled the conflict-of-interest case for $1.4 billion.

Clayton F. Moran, who covers Google for the Stanford Group Co. investment firm, said Blodget's comment shouldn't inspire an exodus of investors, either. The column "isn't new information to the market, which understands that Google is a high-risk, high-reward scenario," Moran said.

Staff researcher Richard Drezen contributed to this report.

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