How long can Googles shares stay airborne

Written by Reuters | New York/San Francisco | Updated: Oct 19 2012, 07:12am hrs
Googles shares have clung tenaciously near record highs after a three-month, 30% rally fuelled by rising optimism about internet advertising, but Wall Street fears it may be running out of steam.

Google stock has hovered near an all-time high of $774.38 since touching that peak on October 5. To break through that level, investors and analysts say it needs to run a gauntlet of risks that could undermine its status as technologys second-most valuable company. The most immediate concerns centre on competition in the mobile arena, which is shaping up as the main battleground for tech supremacy among Google,, Microsoft, Apple and Facebook.

Investors point out that Googles Android despite being the worlds most-used mobile software has yet to yield significant revenue growth. And the company has not yet articulated a coherent strategy in the wake of its $12.5-billion acquisition in May of cellphone maker Motorola Mobility.

In the longer term, a rising wave of regulatory scrutiny both at home and abroad could represent the single biggest risk to the Google story. Regulators are looking into whether Google is competing unfairly by favouring its own properties in its core search product, and whether it inappropriately uses sensitive personal data to target ads.

To be sure, of 45 investment brokerages that cover Google, 36 rate it a buy or strong buy, with the median price target standing at $845 up another 12% from current levels and the most bullish target at $910. Among portfolio managers, at least one maintains a $1,300-target, after factoring in Googles growing cash and securities pile.

Their business model alone makes them an incredibly easy target for a whole bunch of legal matters, said Kim Forrest, an analyst and portfolio manager at Fort Pitt Capital Group who recently owned Google shares.

To date theyve done well managing it, Forrest said, referring to Googles interactions with regulators. But I think its their big risk. Most investors dont fully understand that, professionals as well as retail.

Googles run-ins with regulators over the years have invited comparisons to Microsoft and IBM, two tech giants that were once distracted and constrained by long-running antitrust battles.

They seem to be well-positioned in display ads and mobile, which are nascent industries, said Connor Browne, portfolio manager of the Thornburg Value Fund. The biggest risk by far is regulators bringing an antitrust case, a la the Microsoft Internet Explorer suit that company faced.

Our expectations are nothing material for the stock, but that could be one of the reasons why the valuation is not higher now.

Sources said last week that a majority of commissioners at the US Federal Trade Commission was poised to recommend, possibly as early as November, that the government bring an antitrust lawsuit against Google.

Several companies have accused Google of tilting its search algorithm so that links to its own subsidiaries appear more often in its search results. Google processes two-thirds of all Internet queries in the US and roughly 90% in Europe. But analogies to previous antitrust cases may be off-base, analysts say.

The FTC is not likely to demand actions nearly as dramatic as the forced breakup of telecom giant AT&T in 1984, but the constant threat of antitrust investigations makes it a more highly scrutinised company and therefore they need to tread more carefully than others, said Colin Sebastian, an analyst at Robert W Baird & Co.

It becomes a perception issue that could affect how aggressively Google tweaks its search algorithms, he added.