Google Inc’s shares took a sharp dive on Friday, having been on the decline for most of the week, following the rest of the tech-heavy Nasdaq, leaving observers wondering whether it was a correction, nerves, or merely a reflection of broad market conditions.
The firm lost 8.5% of its value on the week’s last day of trading, dipping below $400 for the first time since it got there in November, closing at $399.50. It had started the week at around $460, and began to slip on Wednesday.
It was the company’s largest single-day drop ever. The Nasdaq Composite Index was 2.4% off on Friday, its largest single-day drop in over two years.
Opinions were split on the reason for the sell-off, and market watchers will today be interested to see whether the slide continues, or whether investors will use the depressed prices as an excuse to snap up some bargains.
Some said that investors became nervous at the company’s fight with the Department of Justice, which wants Google to hand over records of web searches. Google is refusing to do so, raising the possibility of a potentially costly legal battle.
Justice wants the records as part of a case in which it is trying to demonstrate the legality of the Child Online Protection Act, in part by showing that web filters do a poor job of keeping pornography out of the hands of children.
AOL, Yahoo and Microsoft have already handed over samplings of web searches, but Google is claiming that the request is overreaching and should not be enforced.
While no records connecting searches to individual users are being sought, any personal information entered as a search term could end up as part of the public record. If anybody queried Joe Public smokes crack on the sample day, Joe Public should worry.
If that is the reason for the stock dip, it is likely an overreaction. If anything, the fight could drive traffic to Google, as people decide to jump away from search sites that place less value on user privacy. People are not just going to stop searching the web.
Another theory is that the sell-off was a reaction to the first week of earnings season seeing a number of high-profile misses from bellwethers like Intel, Yahoo and Motorola and some firms, like eBay and Apple, that reported in-line but guided lower than expected.
Google also received analyst downgrades. Mid-week, around the same time as Google’s shares began their decline, Stifel Nicolaus and Standard & Poor’s analysts both downgraded the stock from Hold to Sell.
There’s more consciousness now that Google’s high-flying stock may be overvalued, given the substantial exposure the company has to the online advertising market, and company-specific risks such as click fraud.
To some, it is reminiscent of the dot-com bubble days, when ad-supported web companies reached heady valuations, only to find themselves crashing and burning when the bottom fell out of the internet advertising market.
Ironically, one of the most prominent figures voicing a bearish outlook on Google has been Henry Blodget, the former Merrill Lynch analyst who was a central figure in the bubble-era scandal over investment banks cynically hyping rubbish internet stocks.
While he is legally barred from making stock tips, Blodget has been blogging, with appropriate disclaimers, about the bear case for Google for several months, as well as providing a critical analysis of the high-end analyst price targets.
I can say from experience that the biggest fear for most analysts is not bankers or companies but looking like idiots, he wrote recently. Every analyst who has been negative on Google since the IPO… has missed the biggest stock in the sector in the last five years.
For the analysts, this is beyond embarrassing, he wrote. It’s downright painful. Your sales force loses faith in you, your clients lose faith in you, and you wake up every day feeling like an imbecile. Eventually, when you just can’t take it anymore, you climb on the bandwagon.
That said, Wall Street analysts have a wide range of opinions on how much Google is worth. Analysts polled by Thompson First Call have GOOG price targets ranging from $255 to $600. The mean target is $473.90.