Google stock: Bargain or bubble?

SAN FRANCISCO — Is Google Inc.’s incandescent stock a golden opportunity or fool’s gold?

Investors have been arguing that question since Google’s initial public offering in August 2004.

But the stakes have grown progressively higher over the past 11 months as the online search engine maker’s shares zoomed past $200, then $300 and, most recently, $400, as Google firmly established itself as the gold standard in Internet advertising.

“With every $100 that goes by, the risk/reward ratio gets less appealing,” said Hoefer & Arnett analyst Martin Pyykkonen.

Just seven years after the company’s inception in a Silicon Valley garage, Google’s market value has soared above $100 billion — eclipsing a long list of business icons that includes Coca Cola Co., Pepsico Inc., Time Warner Inc., Hewlett-Packard Co. and Home Depot Inc.

While hordes of investors have been hungrily buying Google’s stock, company co-founders Larry Page and Sergey Brin have been busily cashing in on the craze. Through November, Page and Brin, both 32, had each made $1.3 billion by selling a slice of their controlling interest in the Mountain View, Calif.-based company, according to data compiled by Thomson Financial.

But Google’s rapid run-up is making it more difficult to figure out how outside investors can make money on the stock, said Stanford Financial Group analyst Clayton Moran.

“I think the current price is justified, but I just can’t go out and tell my clients to buy the stock now,” said Moran, explaining why he downgraded Google’s shares to a “hold” earlier this week.

Moran values Google’s shares at $425 — higher than more pessimistic analysts like Standard & Poor analyst Scott Kessler, who believes $364 is a more realistic price. Google’s shares were trading around $417 on Friday.

“I think Google is a great company and it has been a great stock, but I don’t have a lot of confidence the shares will continue to ramp up,” Kessler said.

Google’s shares, in fact, would probably tumble badly if the company were to miss the lofty earnings expectations being set by analysts with no guidance from management.

Other thorny issues could easily prick the stock.

The company already is locked in a series of legal battles over the search engine’s alleged abuse of trademark and copyright laws while mighty Microsoft Corp. — armed with $40 billion in cash — continues to invest heavily in a strategy aimed at toppling Google. Some analysts also are worried about Google’s ability to manage a rapid expansion that might include a substantial investment in Time Warner’s AOL.

Nevertheless, betting against Google so far has proven to be a bad idea.

When the company first went public, Google’s skeptics believed fierce competition from formidable rivals like Microsoft and Yahoo Inc. would erode the company’s search engine leadership and, ultimately, retard its earnings growth.

But Google has been widening its lead, giving it more opportunities to serve up moneymaking advertising links alongside its search results. Through October, Google held a 39 percent share of the U.S. market for online search, up from 34.8 percent at the same time last year, according to comScore Networks. Yahoo’s share has meanwhile declined to 29.2 percent from 32 percent a year ago while Microsoft’s has decreased to 14.6 percent from 15.8 percent last year, comScore said.

That’s just one reason most analysts remain optimistic about Google’s prospects.

As Google has introduced more intriguing products to complement its search engine, prominent securities analysts like Benjamin Schachter of UBS Securities and Safa Rashtchy of Piper Jaffray have become convinced the company is bound to become an indispensable hub in a global economy increasingly driven by the Internet.

Google “is a paradigm-changing company,” Schachter wrote in a research report that outlined why he believes the company’s shares may soon reach $500.

Other high-profile stocks in the technology industry generated tremendous returns even after tracing a trajectory similar to Google’s.

Since its IPO, Google’s shares have more than quadrupled from their IPO price of $85. Sixteen months after Microsoft Corp. went public, its stock traded at a split-adjusted 30 cents per share — more than quadrupling from the March 1986 IPO price of 7 cents.

Microsoft’s shares now trade in the $27 to $28 range, meaning someone who invested $10,000 16 months after the company’s IPO would own a stake worth roughly $900,000 today.