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Google Bandwagon Creaks On

The stock recovers about half of its postclose panic selloff.

The

Google

(GOOG) - Get Alphabet Inc. Class C Report

pain subsided a bit Wednesday, as fans of the search engine predictably rallied to its cause.

Shares in the Internet's latest, greatest highflier dropped 9% the morning after an earnings shocker. While Wall Street had expected the company to make $1.76 a share, Google made just $1.54, saying

taxes were killing it.

But steep as it was, Wednesday's selloff seemed positively orderly next to the vibrant selling that accompanied Tuesday evening's report. Stunned investors sent the stock plummeting 17% in postclose action, surrendering gains dating back all the way to Halloween, before Google trimmed its losses late in the after-market session.

On Wednesday, analysts -- who have grown increasingly shrill in their support of the stock's eye-popping run-up -- were quick to point out that the company's underlying results are still quite strong, though some felt moved to trim their gaudy price targets to slightly less absurd levels.

After opening just shy of $390, Google crawled ahead to $393 at late morning Wednesday, down $39 from Tuesday's close. Volume hit 15 million shares at 11:20 a.m. EST, already comfortably ahead of the stock's average daily volume of 11 million shares.

"In short, we believe the market is overreacting," wrote JMP Securities analyst William Morrison, who reiterated his strong buy rating on the stock, in a note to clients Wednesday. "We continue to believe Google is gaining significant market share of global search queries, and the global search opportunity is no smaller than it was yesterday." Still, Morrison cut his price target to $550 from $575, based on 50 times 2007 estimated free cash flow per share and 25 times 2007 earnings before interest, taxes, depreciation and amortization.

To be sure, Google's results were nothing to scoff at. Net income jumped 82% from a year ago to $372 million, or $1.22 per share. Gross revenue jumped 86% to $1.92 billion. Excluding so-called traffic acquisition costs, net sales were $1.29 billion.

"You had a psychological hit here, but not a fundamental hit,'' says Mike Binger, a fund manager at Thrivent Financial, which owns Google shares. "You knew that somewhere down the road that the company would just hit Street guidance instead of wildly exceeding it.''

Binger estimates that the company could earn $9 a share this year and $12 next year.

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Some bulls on the stock were even moved to defend the company's claim that high overseas costs caused it to pay a bigger tax bill this quarter than it could have foreseen.

"The higher tax rate that led to the EPS shortfall versus our estimates is due to the company's practice of estimating its tax provision on a full-year basis and then allocating the expense among the quarters," wrote Goldman Sachs analyst Anthony Noto, who reiterated his outperform rating on Google and maintained a $500 "implied value" for the stock, in a note to clients Wednesday. "This methodology results in a disproportionate effect on the fourth quarter in order for the difference in the full-year provision."

But investors clearly thought the company could do better, since it had beaten expectations for three straight quarters. And the company's poor quarter, coming as it did two weeks after a similar performance by rival

Yahoo!

(YHOO)

, failed to dispel worries among some investors about the health of the tech sector. Even so, the

Nasdaq Composite Index

rallied late in the morning to be flat on the day.

"The outlook remains solid and one of higher growth than just about any other company," writes Lauren Rich Fine, an analyst with Merrill Lynch who has a neutral rating and has been more cautious about Google than many of her competitors. "However, the string of positive surprises has been broken and costs are likely to continue to escalate."

Operating and sales and marketing expenses were higher than Rich Fine expected. Google executives said on the conference call that they were increasing their spending to keep up with the rapid growth of their business, a line that many fans were inclined to believe.

"We continue to believe that the opportunity for Google is immense and that the potential is not included into the current stock price," wrote WR Hambrecht analyst Denise Garcia in a note to clients Wednesday. She maintained her buy rating on the shares but cut her 12-month target price to $455 from $480.

Some investors will no doubt wait to see if Google's shares will drop even further before deciding if they want to snap them up. But Stifel Nicolaus analyst Scott Devitt, who has one of the few sell ratings on the Google, is urging people to wait even longer.

"The bloom is off of Google, search is still a high-growth business long term and Google is the leader, in our view, but GOOG shares will likely face a period of consolidation as unrealistic expectations are tempered," he writes. "In our opinion, it's not time to become a holder yet, but certainly the shares are more attractive in the mid-$300s than the mid-$400s."