For a company as quirky as
, one thing is surprisingly predictable: The seasonality of its stock.
Since the company went public in August 2004, October has always been a strong month for shares of Google. And a selloff at the start of the new year seems to follow like clockwork.
As the bullish sentiment surrounds Google again -- shares are up nearly 20% in the last month -- the stock's trading pattern is important for investors to keep in mind. A slew of analysts have gotten in behind the stock as it ascends, citing new reasons to back the company.
Although many of the reasons that the company has seen its price target get boosted are valid, investors need to realize that shares move as much with the whims of the market as they do because of fundamentals.
In the meantime, October looks like it should deliver another bull run for Google. In October 2004, shares rallied 44%. They ran up 17% in 2005, and 19% in 2006. Only nine days into October 2007, shares are up 5%.
Google's overall late-year run-up is even more pronounced. Starting in August and ending in January 2005, shares rallied 91%. Between August and January 2006, they rallied 51%. And they rose 32% for the same time period ending in January 2007.
But after the start of the year, look out. From the beginning of January to the end of February, shares lost 7% in 2005, 17% in 2006, and about 4% in 2007.
It's difficult to pinpoint why Google's stock trades the way it does. But this whimsy is often lost in the pat earnings-and-price forecasts that analysts bestow upon the company. And instead of shares following analyst targets, as is often assumed, it's often that analysts tweak their assumptions to keep up with recent stock-price activity.
The latest slew of bullishness, for example, seemed to be put into motion on Oct. 1 -- following a 19% run in the stock. Susquehanna Financial analyst Marianne Wolk kicked off the frenzy by issuing a note that day raising her third-quarter numbers for the company.
But Wolk's reasons for raising the numbers -- among them, the weather in England -- seemed to be a stretch.
"We believe growth was led by a surge in volumes this quarter, as poor weather in the U.K. meant far higher activity levels online," Wolk wrote, noting that much else remained the same. "We found no major platform changes influencing monetization in the quarter." Susquehanna Financial makes a market in Google shares.
Credit Suisse followed suit by raising its own numbers the next day. Then last Friday, Bear Stearns upped its price target for the stock to a Street-high $700. And on Tuesday, Bank of America boosted its price target from $620 to $670.
Bank of America analyst Brian Pitz cited a slew of strong reasons for backing Google, including accelerating market-share gains despite its already large stake; continued improvements in its ad-ranking method, international gains; currency benefits, given the strong dollar; and Google's large international exposure. Bank of America makes a market in Google shares.
But the rationale behind choosing a 12-month price target of $670 -- instead of $620 -- is much flimsier. The calculations depend on abstract inputs into a certain company's discounted cash flow model, which include how fast the company grows for so many years out -- and what the cost of capital will be.
What's more, a slight tweak in any variable can mean a huge swing in the price target. "Our DCF
discounted cash flow valuation analysis arrives at a value of $670 per share and a range of $524-$897 based on terminal growth rate sensitivity of 5-7% and a WACC sensitivity of 9.5-13.5%," Pitz wrote.
But just as much, it seems, Google's price might be driven by what time of year it is.