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The Honolulu Advertiser

Posted on: Sunday, February 13, 2005

Great expectations no Google guarantee

By Rachel Beck
Associated Press

NEW YORK — Similarities abound when you compare eBay Inc. and Google Inc. They dominate their industries online, their brand names are widely known and they're part of an elite class of Wall Street darlings.

Well, that last point might have been true until a few weeks back.

That's when eBay shocked shareholders by reporting profits that fell short of forecasts and the company ratcheted back its expectations of future earnings growth. Google's stock, meantime, soared after the Internet search giant reported better-than-expected earnings.

Google's investors may choose to write off eBay's woes as someone else's problem, but they could learn from them, too.

That's not to say that there are forecasts for Google's business to slow anytime soon.

In fact, the company continues to have strong fundamentals and appears to be on a solid growth path.

The fact that Microsoft Corp. and Yahoo Inc. are launching a direct attack on Google in the search-engine business didn't stop Google from blowing past quarterly estimates. Its profits improved sevenfold, and its revenues doubled, to top $1 billion for the first time.

With such strong earnings in hand, investors couldn't contain themselves, pushing the stock as high as $216 a share in the session following the Feb. 2 earnings announcement. While the price has pulled back a bit over the last week due to some profit-taking, it is still around $190 a share, well above the $85 of its August initial public offering.

Many analysts see more good times to come. Goldman Sachs analyst Anthony Noto thinks the stock has the potential to hit $265, basing that on Google being able to leverage its competitive advantages, including its brand notoriety and its sizable advertiser base.

While Google's investors seem to be hooked on a can-do-no-wrong mentality, they may want to consider what happened to eBay in recent weeks as a reality check.

In the months before it reported earnings, expectations soared for what eBay would come up with in the fourth quarter. Analysts touted the online auctioneer as a must-buy for anyone who wanted to hold Web retailing stocks.

Then eBay not only reported results that missed forecasts by a penny — something that companies generally hate to do because they can usually find someplace in their financials to squeeze out an extra cent — it also warned that its financial performance in 2005 would fall short of bullish expectations.

That sent its shares tumbling, and since the Jan. 19 earnings announcement the stock has fallen more than 20 percent, to around $80, as investors weigh whether the earnings shortfall was a one-time event or indicative of more trouble ahead.

Those disappointing figures spurred Piper Jaffray senior analyst Safa Rashtchy to downgrade eBay's stock, and in a note to clients caution that the stock could be "priced for perfection," meaning any misstep could send it even lower.

Just as eBay was viewed as a company destined for constant growth but then failed to meet its targets, can Google really deliver the kind of super-sized growth in perpetuity that its shareholders are pinning their hopes on?

"When you look at eBay, you have to ask when did the expectations get ahead of themselves?" said Martin Pyykkonen, an Internet analyst at Janco Partners Inc. in Denver. "Google's investors will eventually have to consider the same."

Still, plenty of Google supporters are sure to believe that the good times are far from over. In fact, considering that it has only been a publicly traded stock for about six months, its run could be just starting.

And any doubters may want to consider this: eBay's stock has taken a hit in recent weeks, but look how far it has come since hitting its split-adjusted low of around $14 a share in December of 2000.