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Two Abandon Google Bandwagon

Analysts at Stifel Nicolaus and S&P think it's time to reassess.



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is getting too hot for some analysts to handle.

Stifel Nicolaus analyst Scott Devitt and Scott Kessler of Standard & Poor's cut the search engine giant to sell. In doing so they buck the overwhelming sentiment of their peers, most of whom rate the stock buy even after a 300% run-up since its August 2004 initial public offering. Only one other analyst, Philip Remek of Guzman & Co., rates Google a sell, according to



In his note to clients, Devitt argues that Google's share price -- it fetched $453 Wednesday morning after a



-inspired 3% drop -- isn't justified by the fundamentals of the business.

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"We believe Google is an outstanding company," he writes in a note to clients, but "we believe that the shares are overvalued." Devitt, who has no position in the stock, goes on to add, "Sell-side expectations have risen throughout 2005 to the point that we now see limited upside potential."

In addition, Yahoo!'s disappointing results yesterday "broke the sector momentum and sentiment which should now force investors to focus more on what these businesses are worth rather than where the stock may be going," Devitt says.

By Devitt's calculations, Google has an enterprise value that's about three times that of Yahoo! -- a gap that he believes isn't justified. Though he says he is uncertain about the fair value of Google, he believes that it is "well below" the stock's recent market capitalization of $142 billion.

"The company trades for 54% of the enterprise value of


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and is expected to generate approximately 12% of the free cash flow in 2006," he writes. "Even great businesses have a value, and, in our view, Google's market capitalization exceeded its intrinsic business value long ago."

S&P's Kessler, who also has no position in Google, is more optimistic. In a report Tuesday, he raised his 2005 and 2006 per-share earnings forecast for Google to $5.84 and $7.91 from $5.80 and $7.62. Still, he has similar concerns about Google's valuation.

"Our 12-month target price remains $428, based on our discounted cash flow and peer analyses," he writes. "We think Google still faces notable risks, including a lack of revenue diversification, mounting competition and click fraud."

In his note, Devitt notes that other analysts following Google don't see things the way he does. There have been seven positive sell side analyst revisions in the past month. Caris & Co. analyst Mark Stahlman recently argued that Google could theoretically reach $2,000. Piper Jaffray analyst Safa Rashtchy has the highest official target price, at $600.

Google is due set to report earnings on Jan. 31. Analysts are forecasting earnings per share of $1.76 on sales of $1.28 billion, according to Thomson Financial.

Early Wednesday, Google slipped $12.51 to $454.50 and Yahoo! plunged $4.66 to $35.45.