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A Lonely Voice Is Vindicated as Google Falters

"It is a very promotional sector," Devitt said with deadpan understatement. "Some of my colleagues were being very promotional in raising expectations."

"Promotional" is a polite way of saying that Wall Street analysts are pumping up the Internet bubble all over again, leading investors into the same trap that cost them billions of dollars the last time overpriced, over-hyped Internet stocks blew up.

Google, Amazon.com Inc. and Yahoo Inc. all have burned investors in the past few weeks.

Yahoo started it off by warning in early January that earnings would not meet expectations. (Devitt saw that as an omen for Google and promptly downgraded the stock.) Yahoo stock is off 23 percent from its peak a month ago.

Google was the next to go. Its stock is down 19 percent from its peak on Jan. 11. On Tuesday it reported that profit rose only 81 percent last year. Only 81 percent? Yes, Wall Street had been whispering even bigger numbers, so 81 percent was considered a flop.

Last week Amazon.com took the dive. Its stock is down 23 percent from its January peak. Despite all the talk about online Christmas shopping, Amazon.com's sales rose less than expected and its profit was cut in half because the company offered free shipping in an effort to lure customers.

Google's initial public offering of stock was a much-hyped and eagerly awaited event. Still, no one expected Google stock to soar as high as it did. And once it looked like a hit, analysts started predicting that it could go as high as $300 a share. When Google hit $300, they raised their targets to $400. After $400, one analyst predicted that Google would go to $2,000 a share.

Analysts aren't supposed to pull stock price targets out of thin air, so each higher price had to be rationalized by a higher estimate of sales and profits.

Wall Street analysts know all too well how to play this game. They invented it in 1999 and 2000 when the tech-stock bubble was inflating, pushing the Nasdaq Stock Market composite index past 5000.

With the Nasdaq now around 2300, nobody is saying the tech bubble is going to inflate to 5000 again, but plenty of analysts are willing to pump up individual stocks like it's 1999.

Even by the standards of that time, Google is a mind-bogglingly expensive investment. At its peak, the price of the stock was 75 times company profit. Now it's trading at a mere 68 times earnings. In comparison, the S&P 500 stocks sell for 18 times earnings and the blue chip Dow Jones industrial average companies go for 21 times earnings.

Since Google reported its earnings, analysts have finally started taking a harder look at the company's numbers. Google blamed the disappointing profit on income taxes, saying it wound up paying a higher tax rate than expected.

Devitt rejected that explanation immediately, saying that even without paying more taxes, Google would not have hit its profit target. By Friday, the Wall Street Journal was talking up the same theory, calculating that taxes accounted for only half the disappointment, and quoting Devitt.

Wall Street also is likely to start listening to some of Devitt's other concerns.

He thinks Google advertising is infected with "click fraud," a term that covers a variety of ways that advertisers, their competitors and others can game the system and manipulate the number of "hits" that online advertising attracts. He thinks Google's advertising rates are headed for a fall because advertisers aren't getting the results they want. And he thinks the simultaneous fallbacks of Google, Amazon and Yahoo could turn investors off to all Internet stocks.

Those are big issues, and Devitt sees none of them accounted for in Google stock at its current price.

Yet Devitt said he agrees with his idol Bill Miller on the fundamental premise that Google is a great company with a great future. It's just not -- at this time and at $381.56 a share -- a stock worth owning.

Jerry Knight's e-mail isknightj@washpost.com.


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