Rake In Google Gains, Then Sit Tight

The operative word with Google isn't sell but harvest.


The operative word with Google isn't sell but harvest. After going public at $85 a share in 2004 (that's right, it has taken only three years for the company to become a world beater), Google's stock has been the gift that keeps on giving, topping $740 in early November. Along with the rest of the market, it has pulled back a bit since amid widespread economic jitters.

But Google won't stay down for long, say analysts, some of whom have 12-month price targets as high as $900 on the stock. And when it bounces back, that could be a good time to harvest some of those early Google gains, if you're lucky enough to have them. If you invested $5,000 in Google three years ago, and it's worth $30,000 now, why not take your original cash off the table? Buy a new flat-screen TV and a few Sony PlayStations for the kids, sit back, relax, and sleep well in the knowledge that those pure profits are very likely to keep growing.

GOOG, after all, is a stock picker's dream. Less than 10 years after two geeky Stanford graduate students rolled out their algorithms from a Silicon Valley garage, Google is the little search engine that could. Its name has become a verb that's synonymous with search. Only a few years ago, Google was locked in a three-way race with Yahoo! and MSNfor clicks and eyeballs. This fall, it has all but claimed outright victory: Google now owns almost 60 percent of the U.S. search market, and most analysts think that number will keep climbing. Its revenues, the product of an ingeniously straightforward system of charging advertisers every time users click on their ads, are growing almost 60 percent a year.

Should the economy take a dive, Google's business model is even moderately recession proof: If companies tighten their belts, where better to advertise than on the Web, where they can see the payoff of every marketing dollar? Even conservative estimates predict Google will double its revenue—already topping $16 billion this year—by 2011.

Thinking big. Google execs, meanwhile, are expanding along the entire Web waterfront: The company moved into online display advertising this year with its purchase of DoubleClick, and it recently announced two major new pushes into social networking and mobile phones, where it is partnering with tech's A-list to build open-source software in the hottest growth opportunities on the Web. To analysts, the move is a sign of Google's grand ambitions. "Over time, as all advertising goes digital, including television, radio, and outdoor, and Google becomes the de facto 'operating system' for advertisers...tremendous value will be created for Google shareholders,'' Heath Terry, an analyst at Credit Suisse First Boston, recently wrote. "Google is the best investment in the Internet space."

Some analysts do worry about Google's revenue stream. With 99 percent of its sales coming from paid search, the company is still a one-trick pony. "I'd be more comfortable with a company well north of $10 billion with more than one product," says Martin Pyykkonen, an analyst at Global Crown Capital. Google's incredible growth rate also means any moves into adjacent markets (like the much-discussed "Google Phone," which the company has denied developing) would actually hurt its margins. "The easy money's been made," Pyykkonen says. "The next gains on the stock—whether it's 20 or 50 percent over time—are going to take longer to happen and aren't going to be quite as straight up as the early ones were."

Which isn't to say Google's going down. Most analysts agree that the stock, along with all of those clicks and ad dollars, will keep climbing. It's just a matter of when and how fast. So to be safe, maybe just get one PlayStation for the kids, then.