Try Jim Cramer's Action Alerts PLUS
CLICK HERE NOW
Tech Stock Update
Return to Article

Google Gallops Toward $600

Vishesh Kumar

06/27/07 - 07:40 AM EDT
Google(GOOG - Cramer's Take - Stockpickr) is really looking good.

Shares of the search giant hit record highs Tuesday, closing up $2.84 to $530.26. The stock is also up about 15% year to date, roughly double what the Nasdaq has gained over the same period.

The search giant continues to win fans on Wall Street. And while the stock has long been a favorite there, even more hardnosed analysts are now finding unexpected reasons to back the company.

That, combined with signs of turmoil at competitors such as Yahoo!(YHOO - Cramer's Take - Stockpickr) and Microsoft(MSFT - Cramer's Take - Stockpickr), means that Google could be poised for even bigger things.

Just this week, Google saw three bullish calls by analysts. But while those issued by Oppenheimer and Bernstein research tread on well-worn ground -- Internet advertising is growing fast, and the DoubleClick acquisition will make Google a player in display advertising, respectively -- the call by JMP Securities is more persuasive.

Analyst Bill Morrison saw through the run-up in Yahoo! shares earlier this year and issued a cautious report on the company, ahead of first-quarter results, that caused shares to sell off sharply.

But on Monday, Morrison raised his price target for the stock to $625 from $580. With a median price target of $600 among Wall Street analysts -- meaning that just as many peg the price higher as lower than that -- the move swings Morrison from the conservative to the optimistic spectrum on the stock.

With analyst consensus at $600 for Google, how high do you think the stock can go here?
Answer Here

Liability or Asset?

Though Google gets plenty of credit for its growing dominance in the lucrative search market, Morrison points to an item usually considered the company's Achilles' heel as a key hidden asset.

Google's massive spending on technology infrastructure, which generally makes investors skittish, actually provides it with a cheaper technology platform than rivals', he argues. Competitors will either fall behind or have to spend massively to follow suit, which could hit their own stock prices.

"Our analysis suggests that Google may have a 50% to 100% cost advantage over competitors, mainly Yahoo! and Microsoft," and "Google is posed to accelerate its lead in computational ROI over its competitors in the near term if others do not significantly step up their infrastructure investments," Morrison writes.

"This means that competitors are faced with the difficult decision of either falling further behind in the ability to compete with Google or investing aggressively, which could depress near-term margins and stock performance," he writes.

Not that Google's competitors, if recent events are any sign, aren't already facing a very tough road -- another plus for the search giant.

Take Yahoo!, for starters. The company recently saw the ousting of its CEO, Terry Semel, after its tumultuous annual shareholder meeting. And though the appointment of co-founder Jerry Yang to the top spot was to mark the turning of a new leaf, things seem to have turned even more bitter among the company's top ranks.

Just this weekend, Yahoo!'s head of sales, Wenda Millard, became the latest key executive to jump ship. In general, changes in personnel tend to be sanitized affairs, with both parties wishing each other well -- but in this case, knives were drawn.

Yahoo!, in a press release, first implied that Millard had been pushed out because she was no longer up to the job. Millard responded by taking the unusual step of telling the Associated Press that she had been offered a hierarchically better job by Yahoo! upon her resignation but that she parted for what she saw as greener pastures at Martha Stewart Living Omnimedia(MSO - Cramer's Take - Stockpickr).

Want more? Check out TheStreet.com TV video. Kumar on how Google beats rivals like Amazon when it comes to tech spending.

"I am very disturbed that Yahoo! chose to turn my resignation into something that it was not," Millard told the tech blog AllThingsD on Tuesday, responding to the growing enmity. "I feel very sorry for Yahoo! these days."

Millard is often credited as a major player behind Yahoo!'s turnaround after 2001. The unseemly departure could induce even more executives to bail.

The Microsoft Factor

Microsoft, meanwhile, continues to step on landmines online, even as it points to the Internet as a growing source of importance to its business. The company is facing a massive backlash from bloggers in response to a botched online ad campaign that involved high-profile technology bloggers such as Michael Arrington and Fred Wilson.

Microsoft collected glowing comments about its products from prominent bloggers, such as those mentioned above, and displayed them in ad space purchased on the blogs themselves. The move sparked ire among other bloggers who charged that the company was essentially buying influence.

This week, several of those bloggers scrapped the campaign and apologized as the firestorm continued. In December, the company caused a similar controversy when it tried to hand big-name bloggers expensive laptop computers loaded with its Vista operating system in what came to be regarded as an effort to offer bribes for positive coverage.

These events may seem like they are limited to the esoteric corners of the Internet. But because they demonstrate Microsoft's pitiful understanding of the online power brokers it's trying so desperately to impress, investors should take note.

It's looking more like Microsoft's online marketing plan may be representative of its haphazard overall online strategy.

All of which bodes well for potential Google investors who have frequently voiced concerns about the company's ballooning technology spending and the threats from competitors.

Both aspects, it seems, could actually be working in the company's favor.