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This column was originally published on
on Jan. 19. It's being republished as a bonus for
There is no doubt that
is the darling of Wall Street.
Wednesday's downgrade by some small shop only serves as the exception to the increasingly popular analyst game of "top my price target." But what's being overlooked in this game is that the stock's further rise isn't dependent on Google's business. It's dependent on momentum.
Since its IPO at $85 a share in 2004, Google shares have soared about 425%, to $450 a share. I admit I was on the sidelines the whole time during the move, but enjoyed watching the action, as well as the analysts race their targets ever higher. But shares are not moving higher on valuation here; they are moving higher on momentum.
Momentum consists of two important conditions:
- Positive sentiment
- Favorable market conditions
The sentiment surrounding Google over the past few months has been incredibly upbeat, but times are changing.
First off, rumors have surfaced of click fraud. Click fraud occurs when an automated script or computer program imitates a legitimate user by clicking on an ad fraudulently, to generate improper charges. Web-based ad companies, such as Google, usually charge advertisers per click. The more times an ad gets clicked, the more revenue is generated. A recent segment from
"On the Money," suggested that click fraud could account for more than 10% of Google's revenue.
Negative sentiment has also come from lawsuits that have been filed by the Association of American Publishers. These lawsuits allege that scanning and digitizing library books constitutes copyright infringement. I don't see this as a major hurdle for Google, but it does amount to negative press. Remember, it's the sentiment that contributes to the momentum of a stock price.
As for market conditions, there is plenty of evidence suggesting a mild slowdown in the economy and that consumers are at least slowing their pace, if not collapsing.
Consumer spending, which accounts for two-thirds of overall gross domestic product, coupled with corporate restructures following 9/11, boosted earnings to record levels. These earnings have been used for share buybacks and dividends. Now that interest rates are higher and taxes probably will be raised in the future, consumers will begin to close their wallets.
A decline in spending could lead to depleted corporate profits and lower GDP, a trend that is currently taking place. According to
The Wall Street Journal's
economic forecast survey, which consists of 56 leading economists, GDP is expected to grow 3.3% in 2006. That level would be a marked slowdown from the 4.1% growth in GDP over the past 30 months.
And if GDP expands beyond that 3.3% level forecast, Google could face a new headwind. The
could continue boosting interest rates longer than the market currently expects, and an extended period of rate hikes would undermine the positive market vibe surrounding Google. I believe that would crimp the momentum-driven ascent of Google's share price.
If you disagree and believe Google can overcome talk of click fraud and lawsuits and that the broad economy will sustain GDP growth in excess of 3.3% over the next two years, buy Google, because if that happens, the stock could trade higher, perhaps even reaching the stunning $600 target.
But if you, like me, expect the markets to encounter some turbulence over the next years due to a dearth of catalysts, then sell Google.
Better Large-Cap Buys
With Google's market cap at $135 billion, I'd rather put my large-cap exposure in
, which currently sport about the same market cap and have reached it without riding a wave of momentum that could recede at any moment.
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In keeping with TSC's editorial policy, Curzio doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Frank X. Curzio is a research associate at TheStreet.com, where he works closely with Jim Cramer. Previously, he was the editor of The FXC Newsletter and senior research analyst for Greentree Financial.
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