Google's Slump: Simple Supply and Demand

We all knew Google was fallible, but not this fallible. Yet there may be more of a selloff to come -- and it has little to do with anything that's changed in the past few weeks.

Google isn't just down nearly 40% from its Nov. 7, 2007 high of $747.24, it's basically flat with its price of nearly a year and a half ago. You could have bought Google in October 2006 and, even with the slow steady rebound in the stock over the past few days, still have a small loss.

Last week was full of all kinds of discussion about what it means. Some say the worm has turned. Others see a rare buying opportunity. There may even be some broader changes going on with online advertising that could spread beyond Google.

I don't know about any of that. I can't get past the idea that this is still the company that has other tech giants acting bizarre, even desperate. The specter of Micro-hoo (Microsoft(MSFT Quote) and its acquisition target Yahoo!(YHOO Quote)) has been summoned by Google's powers, so they can't be that diminished.

In the late '90s, venture capitalists liked to say the Internet industry was in the first inning. Several years on, we're probably in the third or fourth, so we're not even close to seeing anyone in Google's bullpen -- to stretch the metaphor a bit - warming up.

Something is going on with Google's stock, although I don't think it has much to do with a one-month plateau in mouse clicks. It's more subtle, and it's been building up for months, even years.

Google is nearly alone in opting to not engage in aggressive stock buyback programs. IBM recently announced plans to buy back $15 billion of its stock, following repurchases of nearly $19 billion in 2007. That's a lot of money -- more than Google has in cash on hand.

Amazon.com has recently announced its own buyback program, while others like eBay have been steadily doing the same for a while.

But not Google. There's a good reason for this: Google wants to use its cash to invest in its own operations, taking seriously its mission to do everything it can to better organize the massive ocean of information out there.

Buybacks don't really inform people.

But it gets tricky for Google, because for years the company has been steadily issuing more shares through offerings, acquisitions and insiders exercising options and then cashing in on the shares.

In August 2004, Google floated 19.6 million shares in its IPO. A secondary offering added in another 14.2 million. The purchase of YouTube a year later added in another 3.2 million shares. (Last year's $3.1 billion DoubleClick deal was paid for in cash.)

Insiders have added to that through steady, automatic selling. In the first year following its IPO insiders sold 14.6 million shares. In the past year, insiders have sold another 1 million shares, according to Thomson Financial.

The routine, pre-planned selling doesn't necessarily indicate Googlers are bearish, but it does flood the market with Google shares.

For a long time, the extra shares in the market didn't matter much because demand was so strong. Google was a hot name, and for a while it kept blowing away earnings forecasts quarter after quarter. Demand stayed high.

But that enthusiasm is cooling. Rather than buying Google's stock, institutional investors have turned into net sellers. Thomson data shows net sales of 6.7 million shares by institutions over the past quarter alone.

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