General ramblings, Google, MBA, Microsoft, Stocks, Technology

S&P Downgrades Google’s shares

Yes, that’s right! Standard & Poor has downgraded Google’s share from 4 star to 3 star. It may be surprising for some of you who have pinned your hopes on Google, but it’s not really surprising for me.Everybody knows that Google is the new kid in the block. Just like any other new firm, Google is experiencing an exponential growth now. But this won’t last forever. There will come a time when it’s growth rate will decrease and it will enter the maturity phase in which Microsoft, Adobe etc. are in right now. Ditto for Apple. Investors always build Castles in the Air when they see a relatively new firm doing well. It is during this time that the stock of that firm is more vulnerable to investor castle building. And I feel that this is what is exactly happening with Google right now.

I won’t deny that it is the next big thing. I would be a fool to deny that. So what does the crowd generally do? Keynes explains the Castle in the Air concept by saying that what is requires is not to estimate the intrinsic values of stocks, but rather to analyzing how the crowd of investors is likely to behave in the future and how during periods of optimism they build castles in the air. The successful investor tries to beat the gun by estimating when investment situations are most susceptible to public castle-building and then buying before the crowd. I somehow feel that this is what is happening with Google shares. Everybody is thinking that the next guy will buy more shares. So what does he do? He goes ahead and buy a bunch and tries to cash out before this bubble may burst.

When investors are optimistic about a particular stock, then they predict that everything will be extra rosy. Same goes for pessimism A particular situation might be not as bad as they predict it to be.

Shares are up 19% this month, and are approaching our recently increased 12-month target price of $500. We remain positive on Google’s fundamentals specifically, and online advertising in general. However, risk-reward considerations contribute significantly to our downgrade. With Google today reaching an all-time intra-day high, we are growing increasingly wary of what we perceive to be potentially excessive enthusiasm regarding the company and stock. At current levels, we see the shares as only reasonably valued.

What do you think? Are the Google shares over-inflated? Are you paying for it? Would you buy it?

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8 thoughts on “S&P Downgrades Google’s shares

  1. Well I had written a comment here..but I don’t know why..it disappeared!!

    I will be making an IPO soon if I have loyal investors like parmanu and sparky a.k.a shrav. and allot a sizeable chunk of stocks to big players at a discounted price! 😉

    @shrav,

    Yes there is sth wrong with the analysts for sure. Most of the investment banking companies have agreements with big firms that allow them to own shares of a particular firm. So they would want to give “strong buy” “Buy” or “hold” predictions. Those analysts that have not been absorbed by the firm are the ones who make these kind of predictions! For all we know, they might have done this intentionally to show that Google is “outperforming” their predictions. This will lead to a further increase in the stock price! Most of the investors don’t even know about what’s really happening.

  2. Thanx for the capsule that let me revise the entire 1st yr. Nothing much to say, but the life cycle it followed is pretty much Sigmoid… isn’t .. It is virtually impossible to have the same growth rate going in later part… However, I still think S&P ratings do not capture the potential entirely and hence ………. I will stay goo goo goole.

  3. shrav,

    that sparky came from your being in the sparks team blog (dduuhh!! thought you would figure this one out).

    Sorry, I did use the DVD cover.. I’ll change it soon! But you get my point anyway…right?

    Apun ka desh,

    Yes, they do things differently, and they also manage to create chaos and half-baked products in the process. They are growing now, so their mistakes are being tolerated. They won’t be tolerated once they started getting “older”, or shall we say, start “maturing”.

  4. parmanu is wonderman, you are sparky (his deputy; he is the MVP).

    “..None of us went to ASU*, you know?”

    that is why you are sparky, coz you are at ASU now!

    “… It hires some of the smartest people around who work on a lot of interesting stuff. It has a great work culture too. ”

    And does this statement have any personal motive? Do you mean to say that you are smart? or perhaps, if they hire you, you can tell others that you are smart ???

  5. “parmanu is wonderman,”
    Well not me. I acknowledge no association with that comical charcater.

    “his deputy. he is the MVP”
    U do realize that MVP stands for
    Minimum Viable Person. right?
    There are no deputies for MVP. I am at the least.

    “that is why you are sparky, coz you are at ASU now!”
    Shrav, THANKS for letting me know that u joined ASU!

  6. “U do realize that MVP stands for
    Minimum Viable Person. right?”

    No I didn’t realize that.. I guess I was overestimating you (thought it stood for Most Valuable Person)..anyway have it your way!!

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