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AUGUST 20, 2004
By Timothy J. Mullaney Google: I Came, I Bid, I Profited From my perch as a Google IPO investor, the stock looks like it has plenty of upside. Management, however, better learn some lessons Is it bad form to have a touch of sangfroid at the misfortune of billionaires? I thought of that as I watched the Vox Populi of the cyberworld snicker at the 30% price cut for the initial public offering of search engine Google (GOOG ) on Aug. 17. Poor co-founders Sergey Brin and Larry Page -- each in his early 30s, destined to make but $3 billion each, on paper anyway, with their suddenly-discounted shares. Matt Drudge referred to the most successful five-year-old startup ever as "Giggle" on his Web site. Six months or so ago, some business mags (not mine) had Google dwarfing the Colossus of Redmond in no time flat. From that to Giggle. Buzz can be cruel. As BusinessWeek Online readers know, I bid for shares in Google's auction-style IPO. This is unusual for us: BW policy bars me from having a stake in companies I cover. I actually don't own any stocks, just mutual funds. But the Google auction is so unusual, and seemed so laden with the potential to change how Wall Street does business, that we decided we wanted to see how the auction worked with a bidder's eye. And to avoid any appearance of conflict of interest, I bought with intention of selling immediately. PIZZA MONEY. So, I bid on 15 shares at three different prices: five each at $80, $95, and $125 a share. When Google cut its price range to $85 to $95 a share, from the earlier range of $108 to $135, I cut my bids to $65, $95, and $100 (see BW Online, 8/20/04, "An IPO Afterglow in Googleland"). The final results are in: I ended up with eight shares at the opening-bell price of $85. Within an hour of the first day's Nasdaq trading, I sold them at $98.63, a tidy $87 return after commissions. We're still deciding what to do with the money. Charity, maybe. Pizza, anyone? Google closed in its first day of trading at just over $100. In my humble opinion, it's still pretty cheap, priced at 30 times projected 2005 earnings, once you take out noncash charges for stock options that Google expenses, but rivals Yahoo! (YHOO ) and eBay (EBAY ) don't. This is based on earnings estimates from Standard & Poor's, like BusinessWeek Online, a unit of The McGraw-Hill Companies (and a highly reputable, investor-protection-friendly source of honest research). HARDLY A NOSEBLEEDER. Let's put that price in perspective. Three days ago, the question was whether Google could really command the same price-earnings ratio as the two companies it most resembles: eBay and Yahoo. At the IPO price, Google's 2005 multiple is about the same as Provide Commerce's (PRVD ), which runs Proflowers.com. So instead of being some nosebleed Net IPO from bubble days, Google stock is valued lower than online jeweler Blue Nile (NILE ). It's way cheaper than closeout e-tailer Overstock.com (OSTK ). It's less than the recently beaten-up Amazon.com (AMZN ) and about the same as job-search board Monster.com (MNST ). It's 30% cheaper than Starbucks (SBUX ). None of these companies is growing as fast as Google. None is sitting on a market growing as fast as online advertising. Few have the profit margins or the international opportunities Google has. Show of hands: How many of you think Google should be valued less than Overstock? What, no hands? WEB LEADERS. What we just witnessed was Wall Street pitching a hissy fit over Google's IPO. Money managers didn't like Google's holier-than-thou attitude, manifested by its refusal to talk about likely earnings or share much info -- even about Google's product road map. And institutions are already spooked by a 20% drop in Web indexes the last few months. So big investors screamed for cheaper shares that cut their risk. They won, so they've shut up. I've been getting e-mail all week from readers insisting that what was going on was that fund managers were talking down the price to push profits back to themselves. My fund-manager sources aren't so cynical, surely. But as far as I can tell, none of them look at Google and see Overstock. Unless the public battle over the IPO clouded their vision, that is. One of my jobs around here is to run a hypothetical stock index called the BW Web 20, which is supposed to help people tell the online companies that are emerging blue chips from those that are just swinging up and down as Net stocks go in and out of fashion. Our criteria: Web 20 companies have to be leading change in their industry, using the Net to fundamentally improve an important task, and they have to have excellent earnings-growth prospects with a reasonable valuation. We've been asking ourselves since before Google filed its IPO paperwork in April, Is Google a BW Web 20 company?
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