Google's Gallant Fan

Google (GOOG) got a boost from Wall Street on a day that saw renewed speculation that the stock might be vulnerable.

CIBC World Markets analyst Michael Gallant upgraded the search-engine phenomenon from sector performer to sector outperformer over the weekend and placed a $245 price target on the stock.

News of the report coincides with the reported expiration of the last and biggest lockup on insider stock sales at Google. On Monday, analysts calculated, theoretically up to 177 milllion of Google's 286 million shares outstanding could come on the market, though many of those shares are in the hands of senior executives and are unlikely to hit the market anytime soon.

Google's shares fell $1.25 Monday to trade at $186.15. The stock, priced at $85 a share in Google's initial public offering of stock six months ago, hit a high of $216.80 in early February, following release of the company's surprisingly good fourth-quarter earnings.

While Gallant's price target is by no means a Street-high estimate -- that distinction is the $275 target published by Credit Suisse First Boston and, separately, American Technology Research -- Gallant's report signals Wall Street's growing comfort with the financial performance of a prickly newcomer to the public markets.

Now that the company has gotten through two quarters' worth of financial statements, neither Google's rapidly rising stock price nor forecasts of runaway growth for the company seems as outrageous as it once might have.

In his report, dated Sunday, Gallant says the roughly 31% upside implied (at Friday's closing price) to his price target contrasts with a 9% risk to his expected floor for the stock of $170.

Behind the upgrade is Gallant's perception that certain risks posed to Google are diminishing, such as that represented by the biggest new entrant in the search business, Microsoft's ( MSFT) MSN.

"We are now less concerned with the competitive threat posed by MSN over the near-to-intermediate term (beyond noise, of course)," writes Gallant, "and more bullish about the domestic search market's growth outlook in '05 and '06 even without a significant ramp in local search spending."

The threat that the latest lockup will pressure Google's shares, says Gallant, is offset by the the pullback of Google's shares from their early February peaks.

"Our analysis and client relationships suggest there will be enough institutional investor demand to soak up any supply that comes to market," writes Gallant.

In assessing the risk that the latest lockup expiration will flood the market and drive down Google's share price, Gallant calculates that nearly half of the 177 million shares affected by the expiration are held by executives who have committed at least a portio of their holdings to scheduled selling plans. "Thus," he says, "we do not anticipate any incremental selling on their behalf."

As for the 90 million remaining shares covered by the lockup, Gallant says a worst-case scenario would have Google employees selling 31.5 million of those shares, or about $6 billion worth of stock at current prices.

While that's a lot of stock, Gallant says he believes there's institutional investor demand for it. If professionals buy up all the stock coming on the market in the worst-case scenario, he calculates, that would mean institutional holdings of $14 billion in stock, or 26% of Google's market capitalization.

By comparison, says Gallant, Yahoo! ( YHOO) has $40 billion institutional ownership, amounting to 82% of its market cap; eBay ( EBAY) has $50 billion of shares, or 92% of its market cap, institutionally held, and Amazon.com ( AMZN) has $13 billion of such ownership, or 86% of its market cap.

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