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?