Google on the Rack

Google (GOOG Quote) shares continued their recent decline Monday, dropping 4% as the company and its fearless leaders got bad write-ups in two huge magazines.

Google founders Larry Page and Sergey Brin and CEO Eric Schmidt appeared on the cover of big-circulation newsweekly Time Monday, alongside the headline "Can We Trust Google With Our Secrets?" But as compelling as that question may be, investors were far more taken by an article in Barron's that argued the stock could lose half its value over a year.

Barron's says Google's earnings could "easily disappoint" Wall Street's sky-high expectations as challenges mount. The financial weekly cites heightened competition from the likes of Microsoft (MSFT Quote) and Yahoo! (YHOO Quote) along with rising costs and worries over click fraud as major hurdles for the Mountain View, Calif., company.

Google's impressive financial performance doesn't justify the valuation of the stock, Barron's writes. Wall Street analysts expect the company's earnings per share to rise to $12.06 in 2007 from $8.85 this year, according to a Thomson Financial survey. But, as Barron's points out, those figures come with an asterisk attached.

"While those are heady numbers, they exclude stock-based compensation expenses and include substantial interest income from the company's $8 billion cash hoard," Barron's says. "If expected stock-based compensation of $320 million and interest income of $320 million are tax-adjusted and deducted, 2006 estimates shrink to $7.47."

Barron's says that based on a sane reckoning of the company's numbers, Google is trading at a price-to-earnings multiple of 45, which is double the level that outfits like Microsoft and Dell (DELL Quote) fetch even as they continue to dominate their markets.

Barron's got a reduced value for the shares by cutting a bullish 2006 revenue estimate by 20%, cutting expenses by 5%, deducting stock-based compensation and giving the company credit for the interest income on its cash. Earnings would be 30% lower than the optimistic $6.28 projection. If the stock maintained its current multiple, it would be worth $257, Barron's says. If the multiple contracted to 30, the price could hit $188, according to Barron's.