Goggle-eyed over Google stock
Famed investor and former Fidelity Magellan fund manager Peter Lynch sums up his stock-picking philosophy with the simple dictum "Buy what you know." Who doesn't know Google? Now investors will get a chance to put Lynch's theory into practice as the company behind the world's most popular Web search engine prepares to go public. In papers filed last week with the Securities and Exchange Commission, Google said it is planning to raise $2.7 billion in a public stock offering.
Google plans an online stock auction, although there were no details on how many shares will be offered, when, and at what price. But stock junkies eager to peek at Google's books found plenty to whet their appetite. It turns out that the company, started in 1998, has been profitable for the past three years, earning $105.6 million on revenue of $961.8 million last year. The revenue was about what analysts surmised, but profits were at the low end of expectations.
Hyped. Still, Google's notoriety and successful business model will surely make its entrance onto Wall Street "by the far the most hyped IPO in years," says Paul Bard, an analyst with Renaissance Capital in Greenwich, Conn., which specializes in new issues. "Even if a person knows nothing about IPOs, they'll know about this one--and it will probably be one of the biggest deals of all time."
If Google raises $2.7 billion, the offering would be one of the 15 biggest in U.S. history and by far the biggest Internet IPO. And analysts say Google's IPO could more than double in price on its first day of trading. Many think Google could go for $15 billion or more on the open market.
That would be great news for Google's founders and venture capitalists, but perhaps not for Google's new shareholders--at least the ones buying shares on the open market after the stock has spiked higher. They may be paying an awfully inflated price. Even if Google's price merely doubles on its opening day, its market value of $5.4 billion would be hefty for a company with earnings of $100 million. By comparison, Office Depot, another $5.4 billion company, posted 2003 earnings of $276 million.
There are also risks peculiar to the search-engine business. As George Colony, head of Forrester Research in Cambridge, Mass., points out in a recent report, "Google has made lots of enemies." Yahoo! is developing its own search engine, and so is Microsoft. Just Google "search engine,"and you'll find dozens. The barrier to entry is low, after all. Google itself is the brainchild of two Stanford University grad students, not some massive corporate R&D effort. And if a better search engine comes along, consumers could drop Google with a few keystrokes and a click.
Then again, maybe the always innovative company will not only firm up its dominance of the search business but extend that mastery to other areas such as shopping and E-mail. Maybe, maybe not. It's one thing to push the "I'm feeling lucky" button when you launch a Google search. It's quite another when you buy Google's stock.
This story appears in the May 10, 2004 print edition of U.S. News & World Report.