The Ignorant Investor

Okay. We've seen Google shares break the $400 mark. As I've made clear in earlier entries, I passed on the stock a while back because I thought its prospects were limited. Now every increase in the share price is the source of intense psychic pain to me. But screw it. There is literally no cost to sticking to my guns, so to the guns I shall stick. Google is now worth more than E-Bay and Yahoo combined, which is ridiculous given the number of eyeballs looking at both those sites.

I hereby reiterate my earlier position: Google will tank. But if the Financial Times has the story right, almost nobody in the stock business agrees with me:

Google's stock has risen about $100 since it dazzled Wall Street with unexpectedly strong third-quarter earnings a month ago. Since then, analysts' average estimate of next year's earnings has been raised $1.12 to $8.44, according to IBES, which monitors analysts' predictions. While earnings estimates have risen about 17 per cent, the shares have jumped more than twice as fast.

Despite a rapid ascent that echoes the euphoria of the dotcom boom, most analysts continue to be strong supporters of the stock, arguing for it to rise further. Of 34 analysts who have ratings on Google, 25 recommend that investors buy the shares and eight rate it a "hold", according to data from Bloomberg.

So 74% of analysts are now pushing Google. That sure explains the rapid movement of vast amounts of cash into the stock. Remember these guys and their rosy predictions. When Google tanks -- and it will tank when everyone's expectations on future earnings come back down to Earth-- remember that most analysts covering the stock didn't give their clients a shred of warning. Useless, they are. Except maybe for this guy:

Philip Remek at Guzman, the lone analyst who is bearish on Google, said the bullish predictions failed to reflect the greater competition that Google will face in future, particularly from Microsoft. "Google's niche was overlooked for some time by big companies, and that's ending," he said. Microsoft, which has launched its own search engine, is expected next year to add its own online advertising service, directly rivalling Google and Yahoo.

There isn't any question that Google will continue as the dominant player in online advertising, but competition inevitably means lower margins as all three players compete for the same ad dollars. Lower margins would mean lower earnings, making it hard for Google to grow earnings fast enough to justify that sky high multiple it's trading under now.

Then again, this is the ignorant investor talking here, and what do I really know about Google's business anyway? Ask me about movies. I watch a lot of those.