Google Bears Growl New Tune

Two analysts change their sell ratings to hold as the stock slides.
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Google's

(GOOG) - Get Report

sharp drop has some bears coming out of hibernation.

Analysts Scott Devitt of Stifel Nicolaus and Scott Kessler of Standard & Poor's, who stunned investors last month when they slapped sell ratings on the beloved search engine company, are getting closer to actually encouraging investors to buy the stock, now that it's down sharply since

last week's earnings setback.

Google gave ground again this week, hitting $355 early Friday, down from last Friday's close of $381 and the company's Jan. 31 pre-earnings release level of $432. In light of the selloff, which has knocked 17% off the stock in just eight trading days, both analysts changed their ratings from sell to hold.

That's not to say that either analyst is now bowled over by the buying opportunity offered by the stock, which even now is up more than 300% on its August 2004 initial public offering price.

"At current valuations and with a view toward the long-term, we prefer

Yahoo!

(YHOO)

shares, given that Yahoo!'s enterprise value is approximately 36% that of Google," Devitt says in a Feb. 6 note. He recommends buying Google shares at $314.

Kessler weighed in a day later, saying that he thought Google shares were "reasonably valued" since they were trading below his 12-month target price of $390.

Devitt and Kessler are still in the minority of Wall Street analysts, most of whom considered Google shares a buy before earnings were released on Jan. 31 and still urge investors to buy the shares. Their average target price is $490.50, according to data from

Bloomberg

. The shares traded up $1.27 at midafternoon Friday to $360.04.

Google continues to baffle even the most seasoned investors. The company provides no earnings guidance and is parsimonious in what information it does provide. Until now, analysts have underestimated Google's profit growth, but during the fourth quarter they overestimated it.

"We continue to believe Google faces considerable risks, including click fraud, mounting competition and the absence of revenue diversification," Kessler says. He also cut his price target for Google to $390 from $420.

The decline hasn't been enough for analyst Philip Remek of Guzman & Co. to change the sell rating he put on Google last year. He is now the only analyst who urges investors to unload Google shares, on which he has a target price of $310.

In an interview, Remek says he remains convinced he's made the right call.

"I still think it's overvalued," he says. "It's not as overvalued as it used to be. I don't look so crazy anymore."

Remek and other Google skeptics point out that Google must sustain hyper-growth rates to justify the multiple. Though Internet advertising spending continues to rise, that money may not all go to the search market, Remek says.

For now, these skeptical analysts will be overshadowed by their colleagues.

The latest analyst to urge investors to snap up Google shares is Denise Garcia of WR Hambrecht. In a note to investors Friday, Garcia says Google's prospects remain huge. She reiterated her buy rating and $455 price target.

"This is the time investors have been waiting for -- expansion into International Internet markets, multi-platform products, expanded advertising opportunities, and a serious step into the desktop software market," she writes. "It is also a time of considerable risk. While the faint of heart leave the table, we believe Google's vision is just getting started."