Friday, April 22, 2005

The Story of Google

Google had its IPO (initial public offering of its stock to the public) on August 18,2004 and began trading on the Nasdaq on August 19. The IPO price was 85. As I write this GOOG (Google's symbol on the Nasdaq) is trading at 224 after yesterday's very positive earnings announcement.
I have been very bullish on Google ever since its IPO as my market friends will attest. Why? My bullishness has really been a deduction made using contrary opinion techniques.

First the backdrop. The Nasdaq 100 index had dropped more than 80% from its 2000 high around 4800 to its 2002 low at 800. Tech stocks had been killed and many dot com companies had gone bankrupt. Enron and Word Com had vaporized and the whole telecom sector was a disaster area. The public hated tech because the collapse of tech and telcom stocks caused a meltdown in their 401k's and had forced them to give up dreams of early retirement.

Google is a search engine company, placing it squarely in the middle of the tech and dot com sector. Its IPO was widely discussed during the spring and summer of 2004. Some people thought the IPO price would be as high as 135.

In the event, Google's novel "reverse auction" (which cut out the investment banker middlemen) yielded an IPO price of 85, quite a bit below hopes and expectations. This perhaps shouldn't have been too much of a surprise given the public's new found skepticism (born of heavy losses) about dot com stocks:

"Gloomy IPO market wonders about life after Google's entry", Wall Street Journal, 8/23/2004

"Weak demand leads Google to lower its sights", New York Times, 8/19/2004

"How miscalculations and hubris hobbled celebrated Google IPO", WSJ, 8/19/2004.

And here's my favorite one:

"IS NOW THE TIME TO BUY GOOGLE? Though price is now lower, history suggest waiting six months to grab an IPO", WSJ, 8/19/2004.

On 8/19/2004 GOOG closed at 100. Six months later, on 2/17/2005 GOOG closed at 198.

My basic impression, developed by reading the popular press' comments on Google during August, September and October of 2004, was that opinion leaders WANTED Google's stock price to collapse. They HOPED that those "arrogant dot commers" and the fools who bought GOOG after its IPO would soon learn the lesson the public had learned during 2000-2002: tech was trash.

I had one other reason for being bullish on Google. I thought that the general public didn't want to hear about investing in stocks and that as a consequence there wouldn't be many exciting "story stocks" around to be driven higher mostly by hopes and dreams. So a very big chunk of the hedge fund and day trader money and tech fund money would have nowhere to play but in Google's stock. So I expected GOOG to inflate beyond any reasonable expectation.

Today GOOG traded at 224. Is this the top? I doubt it. In fact I think that during the next year GOOG will double from its current levels (YIKES!)

No comments: