Updated from 10:52 a.m. Google gave the flagging Internet sector hope Monday with news that its initial public offering is drawing strong demand. The search-engine company said in a regulatory filing that it expects to raise as much as $3.32 billion in its hotly anticipated IPO. Google pegged the per-share price at between $108 and $135. The top end of that range is half again as much as some observers had expected, and puts the company's price-to-earnings ratio well into the triple digits. The positive development comes at a crucial time for pricey Net stocks. After a robust first half of the year, these companies have been hit hard this month amid growing worries about valuations and competition. Investors grew skeptical after Yahoo!'s ( YHOO) less-than-scintillating second-quarter earnings report three weeks ago, and the sector's prospects appeared even dimmer after earnings setbacks at Amazon ( AMZN) and eBay ( EBAY). Now, with Google's IPO drawing strong interest, investors hope that the company's rivals -- ranging from giants like Yahoo! and Microsoft ( MSFT) to also-rans like Ask Jeeves ( ASKJ) and FindWhat ( FWHT) -- will see their shares bid up as well. Early Monday, shares in the big Internet stocks were narrowly mixed, with eBay down a penny at $75, Yahoo! up 19 cents at $28.38 and Amazon up 19 cents to $40.17.
The offering is valued at between $2.66 billion and $3.32 billion. The company in its late April initial filings pegged the value of the deal at $2.7 billion. While Monday's $3.32 billion valuation surely is eye-popping, Google has given indications in the past that it may not reach for the highest possible IPO price. In previous filings, Google suggested it might set a lower price in hopes of distributing its shares more broadly. And in a July 12 regulatory document, the company said that setting a lower price "may result in less downward price volatility in the trading price" for its stock "in the period shortly following our offering." In other words, Google seems to subscribe to the notion that the lower the price is, the less it is likely to fall as the initial buzz of the IPO lessens. Google is going public through an unusual Dutch auction process in which would-be investors will bid on the stock before it is priced. The company again warned investors in the filing Monday that it doesn't expect the stock to experience the kind of early appreciation that was typical of technology IPOs during the Internet bubble. "As part of this auction process, we are attempting to assess the market demand for our Class A common stock and to set the size and price to the public of this offering to meet that demand. As a result, buyers should not expect to be able to sell their shares for a profit shortly after our Class A common stock begins trading," it said. Google said the minimum bid will be for five shares and said the stockwill probably be delivered to investors sometime in August.
Based on the company's 268 million shares outstanding cited in the filing, Google earned 53 cents a share in the first half. On an annualized basis, that's a $1.06 a share -- putting stock at a back-of-the-envelope price-to-earnings ratio of 115, based on the IPO range midpoint. That kind of multiple is hardly unheard of in the Internet industry, where until recently many big players didn't even have earnings. Yahoo!, for instance, trades at 85 times the 33 cents in earnings that analysts expect for the company this year. But the recent selloff in these shares points to presure on those premium multiples. Meanwhile, the S&P 500 earnings multiple rarely goes beyond the mid-20s. The news comes as Wall Street struggles to make sense of the reviving Internet advertising market. Several big players in the sector enjoyed a first-half rally, but the good news has recently come to an end amid a series of earnings disappointments. Worries about growth in the Internet ad business came to a head Friday, when Amazon and Yahoo! each fell 2% and eBay dropped 10%. All those stocks have lost at least 15% of their value during a pronounced July swoon. Among the chief concerns, investors say, is growth in the pay-per-click search business that is the core of Google's revenue. Setting off the Net selloff earlier this month, Yahoo! indicated that its paid search business was sequentially flat in the second quarter, after enjoying quarters of impressive sequential growth.
As some had speculated, Google wasn't immune to the slowdown that hit Yahoo! in the second quarter. In its Monday filing, Google noted it had 7.5% sequential revenue growth in the second quarter, down from 27.2% sequential growth in the first. The company attributed the slower growth to "seasonality," specifically "slower growth in the number of page views and search queries, and ultimately paid clicks." Google also noted that it had entered into no significant new agreements in the second quarter for supplying search-related advertising to other publishers' Web sites.