Google on the Rack

The stock is tortured by write-ups in <I>Time</I> and <I>Barron's</I>.
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Google

(GOOG) - Get Report

shares continued their recent decline Monday, dropping 4% as the company and its fearless leaders got bad write-ups in two huge magazines.

Google founders Larry Page and Sergey Brin and CEO Eric Schmidt appeared on the cover of big-circulation newsweekly

Time

Monday, alongside the headline "Can We Trust Google With Our Secrets?" But as compelling as that question may be, investors were far more taken by an article in

Barron's

that argued the stock could lose half its value over a year.

Barron's

says Google's earnings could "easily disappoint" Wall Street's sky-high expectations as challenges mount. The financial weekly cites heightened competition from the likes of

Microsoft

(MSFT) - Get Report

and

Yahoo!

(YHOO)

along with rising costs and worries over click fraud as major hurdles for the Mountain View, Calif., company.

Google's impressive financial performance doesn't justify the valuation of the stock,

Barron's

writes. Wall Street analysts expect the company's earnings per share to rise to $12.06 in 2007 from $8.85 this year, according to a Thomson Financial survey. But, as

Barron's

points out, those figures come with an asterisk attached.

"While those are heady numbers, they exclude stock-based compensation expenses and include substantial interest income from the company's $8 billion cash hoard," Barron's says. "If expected stock-based compensation of $320 million and interest income of $320 million are tax-adjusted and deducted, 2006 estimates shrink to $7.47."

Barron's

says that based on a sane reckoning of the company's numbers, Google is trading at a price-to-earnings multiple of 45, which is double the level that outfits like Microsoft and

Dell

(DELL) - Get Report

fetch even as they continue to dominate their markets.

Barron's got a reduced value for the shares by cutting a bullish 2006 revenue estimate by 20%, cutting expenses by 5%, deducting stock-based compensation and giving the company credit for the interest income on its cash. Earnings would be 30% lower than the optimistic $6.28 projection. If the stock maintained its current multiple, it would be worth $257,

Barron's

says. If the multiple contracted to 30, the price could hit $188, according to

Barron's

.

Bulls were quick to trot out their well-worn defenses of the stock.

"That's the case with any high-growth company," UBS analyst Benjamin Schachter, who rates Google neutral, wrote in response to the

Barron's

scenario. The article "rehashes many well-known risks," he says.

Other Wall Street analysts also came to Google's defense. Citigroup's Mark Mahaney today reiterated his buy rating on Google and $490 price target. He sees the March 2 analysts' meeting and the likely inclusion in the S&P 500 as catalysts for the stock. Citgroup has provided investment banking services for Google in the past 12 months.

"Google's fundamentals remain very strong," he writes in a note to clients. "They are far-and-away the best fundamentals in the industry."

The company's stock may benefit from the March 2 analysts day and its likely inclusion in the S&P 500, Mahaney says.

The

Barron's

article came less than a week after two Wall Street analysts, Scott Kessler of Standard & Poor's and Stifel Nicolaus' Scott Devitt, raised their ratings on Google shares to hold from sell. Phillip Remek of Guzman & Co. is the only Wall Street analyst who officially rates Google shares sell.

After spending a year and a half being bowled over by all things Google, observers are starting to change their tune. Even at reduced levels, the stock is up 300% on its August 2004 initial public offering, and most Wall Street analysts still consider the stock a buy, targeting a price north of last month's all-time high.

Still, the stock's descent over the last month has been pronounced. Google reached the all-time high of $475 on Jan. 11 before starting a mild dip. The stock then traded at $432 before the company's Jan. 31 release of disappointing fourth-quarter earnings restarted the selloff in earnest. On Monday, the shares dropped $15.53 to $347.08.