Google's share is so expensive

Slashdot It! Google's share had risen to pass the US$500 dollar mark Google closed on Tuesday at $509.65 a share. Having gone public just two years ago at $85 a share, it's a remarkable run-up in price for an 8-year-old California firm that searches the Internet for information on everything. It makes money by selling ads that millions of people click on each day. "People don't want to be left behind with a stock like this," said Scott Kessler, an equity analyst who follows Google for Standard & Poor's. " The question is whether Google's market performance accurately reflects the achievement of an extraordinarily innovative company dominating its field, or is a product of unrealistic and unsustainable hype. It was just six years ago that a similar frenzy of technological innovation and investor excitement came to a crushing end as numerous speculative bets on nascent technology firms proved overly optimistic. Where General Motors and Ford were once at the heart of the national economy and identity, companies like Google that specialize in technology applications have taken on that role. "Even if people don't understand Google, they see it as a watershed company that represents where we are headed," he said. There are just a handful of U.S. stocks that trade at prices north of $500. Those include Chicago Mercantile Exchange Holdings Inc., another highflying relatively new issue, and legendary Wall Street darling Berkshire Hathaway Inc., whose Class A shares trade for more than $100,000. Google has soared because of its technological prowess as a search engine and because it is a social phenomenon. "There is this enthusiasm and emotional connection certain stocks have with users," Kessler said. "That means many people are employing the Peter Lynch method of investing, 'Buy what you know.'" With Google, "People around the world can get answers to most anything they are seeking for free in a very easy fashion and that helps in their day-to-day lives," he continued. "What could be better than that?" "Google accounts for 61.6 percent of all U.S. searches," said Bill Tancer, general manager of global research for Hitwise, a Web tracking firm. "The next biggest competitor is Yahoo, with 22.4 percent of the market." Never ending of improvment Through search, Google sells advertising, mostly small text ads that accompany the results. Now it is rolling out new products such as video searches and an e-mail service that comes with ads. It bought YouTube last month for $1.65 billion in stock and is pushing other products like Google Maps as vehicles to reach an audience and sell advertising. None of that is likely to surpass its search business. "The one thing that's going for them is that the amount of information on the Internet keeps growing at leaps and bounds," Tancer said. "As that trend continues to grow, search will continue to be the key to Internet use." At $509.65, Google is selling for 63 times earnings per share, an extraordinary multiple, given that blue-chip companies like McDonald's Corp. sell for 18 times earnings. At its current level, Google's share price is tough for some analysts to swallow. "The likelihood of it continuing to go up is far, far less than the likelihood of it going down," said Rick Summer, an equity analyst at Chicago's Morningstar Inc. "Right now we think the market has gotten overly excited about a very hot company in a very hot industry." He thinks Google is a company that should have a market valuation of $80 billion or $90 billion, or $315 a share, and not the $156 billion it was valued at Tuesday after the stock market closed. At that level, Google is worth more than just about any American company, save Exxon Mobil Corp., Wal-Mart Stores Inc. and a handful of others. Earlier this year, Google shares fell to $338, closer to Summer's current target price, but have rocketed higher in the wake of strong earnings and the YouTube acquisition. Kessler, the S&P analyst, says Google shares are "reasonably priced" now.