Google Bears Burden of Net Setback

Updated from July 21

As the Google IPO countdown winds to a close, it grows increasingly clear that time hasn't been on the company's side.

After months of hype, Wall Street expects the search-engine phenomenon to get on with its initial public offering in coming weeks. For many reasons, no one is certain what price the stock will fetch. But it's a good bet the number would have been higher had the IPO taken place a month or two ago, according to professional buy-siders who are mulling over possible bids.

In part that's because of the secrecy surrounding Google. But equally noteworthy has been the sharp reversal in the market's view of the outlook for Internet stocks.

After a robust first half of the year, these companies have seen their shares hit hard throughout July amid growing worries about valuations and competition. Investors grew skeptical after Yahoo!'s (YHOO Quote) less-than-scintillating second-quarter earnings report two weeks ago. But if anything, the Net sector's prospects look even dimmer after this week's earnings setbacks at Amazon (AMZN Quote) and eBay (EBAY Quote), which ignited a broad-based Nasdaq selloff Friday.

That's not to say the Google IPO will flop. There is still plenty of demand for the stock. But there's not as much excitement as there may have been a few months back, when the Net sector resurgence story was intact.

On Friday, Amazon and Yahoo! each fell 2% and eBay dropped 10%. All the stocks have lost at least 15% of their value during the July swoon.

Landmark IPO

To be sure, Google's unique circumstances -- its growth and profitability, its secretive nature, its popularity among the Internet populace and its idiosyncratic efforts at changing business practices on Wall Street -- are combining to build excitement behind what looks to be a landmark IPO.

But for all the hype, professional investors still have to figure out what price they're willing to pay for Google's shares. And because Google is setting the offering price via an auction, the job this time around will be even trickier than is usually the case.

Rather than assuming that, as in the case of past IPOs, underwriters will price Google's stock to improve the chances of a heartening first-day pop, buy-siders who might have dreamed in the past they would get an allotment of shares are at the mercy of a less fettered interaction of supply and demand -- one affected by such factors as remarkably large retail investor interest, a relatively limited float and no easy comparisons to be made to companies already trading.

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