Google shares tumble nearly 10 percent

Eric Auchard

SAN FRANCISCO: Google Inc. shares tumbled 8.5 percent on Friday - their sharpest drop ever - as mounting concern over Internet sector growth fused with fears over Google's heady valuation.

The stock that bullish analysts on Wall Street said earlier this month was headed soon for $600 turned tail and fell below $400 as the shares suffered their worst day and week of trading since the Web search leader went public in August, 2004.

Suddenly - with little warning if you ignore the two rare brokerage downgrades of Google's stock earlier this week to "sell" - the phenomenon that has come to embody rapid growth and speculative possibilities of high-tech stocks was sinking.

Analysts pointed to any number of different reasons ranging from a sluggish sector outlook by rival Yahoo earlier this week to a legal spat between the U.S government and Google.

"The most obvious reason were the mixed earnings results from Yahoo," Standard & Poor's analyst Scott Kessler said of Tuesday's disappointing quarterly earnings report from Yahoo Inc..

The sell-off spread to other Internet stocks and then to the technology sector generally, leading to the worst day in stocks since March 24, 2003, when investors fretted over how long the Iraq war then underway might last. The Dow Jones erased all gains for 2006 as the Nasdaq 100 fell 3 percent.

Google shares, which traded as high as $470 last week. closed at $399.46 on Nasdaq -- trading below $400 for the first time since it burst through that plateau in mid-November.

At one point the stock fell as low as $394.74, a drop of almost 10 percent.

Google now trades at 46 times the consensus Wall Street forecast for 2006 earnings, down from 50 times earnings.

"We are seeing a little bit of a rush to the exits," said Herb Kurlan, president of Vtrader LLC, an online trading company in San Francisco.

Analysts said Yahoo's results suffered from higher investments in new product development that pose the threat of mounting competition for Google and other Web companies in the coming year. Google plans to report its results on January 31.

Henry Blodget, the fallen Merrill Internet analyst, said in a posting on his Internet Outsider Web blog earlier this week that Yahoo's slowing growth could be due to Google gaining market share, or the result of a broader industry slowdown. "In which case Google is screwed, too," Blodget opined.

"In any case, the global online advertising industry no longer seems to be growing fast enough to justify the sector multiples -- Google's included," Blodget said in a Tuesday posting on his blog.

Google stock on Tuesday was trading at $470, representing a roughly 450 percent rise since its initial public offering in August 2004. "It was just a matter of time before there was some consolidation of these gains," Standard & Poor's Kessler said.

Kessler and analyst Scott Devitt of Stifel Nicolaus both downgraded Google shares to rare "sell" ratings this week, among the negative factors that may only now be figuring into the market's sharp reaction.

Another issue is the brewing controversy between Google and the U.S. Justice Department. Google is resisting a request by the government for Web search data to help the United States make its case in support of a federal online pornography law.

"There are potentially concerns that Google could be in the cross-hairs of the Justice Department," Kessler said.

But some analysts defended the stock, with UBS analyst Ben Schacter saying in a note to clients that the shares have only lost a month's worth of gains, even if they are down 14.3 percent this week.

The UBS analyst maintained his $500 12-month price target and said that Google's spat with the government would have "zero financial impact" on the company and could be positive.

(Additional reporting by Daniel Burns in New York, Jim Finkle in Boston and Doris Frankel in Chicago)