Google IPO skepticism

May 2, 2004
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Whole bunch of it at this blog.

Naturally, I’m skeptical about the the company and its founders, who stand to make oodles of extra free money if the IPO price is suitably high. Yet I’m also skeptical of the skeptics: If I were hoping to buy a block of Google shares in the IPO, I might trash their prospects to cool demand for the stock so I get mine at Costco prices.

This is one of the reasons wise people are saying “give the market a while to make sense of the Google IPO.”

For context, consider the case of United Parcel Service, whose shares were traded publicly for the first time on Nov. 11, 1999. The stock opened at $65, rose to $75 in the next two days and plunged, falling to as a low as $50 in the next few months. It didn’t resume trading regularly above $65 until last fall.

So here’s one of the most recognizable brands on earth, “the tightest ship in the shipping business,” with a proven track record whose stock goes on the market at high price by IPO standards. A bet on UPS’s service is a no-brainer: pay the next-day fee and you get your goods tomorrow. But a bet on UPS’s stock — if you bought at the overhyped IPO prices — could’ve taken four years to pay off. Savvy investors who knew UPS was a good company whose stock would inevitably go out of fashion waited their turn, bought UPS at $50 and are happy as clams with it trading at $70.

A lot of folks are apt to make the incorrect comparison to Ebay, whose stock has defied gravity and made tons of money for its early investors. Ebay has always been a hot stock: the company’s sales and earnings growth have been so powerful in the past couple years that people who hated all tech stocks were still buying Ebay — its business performance and its stock performances made it a rock-solid bullish bet. It’s easy to forget that Ebay was popular but untested when it went public in the fall of ’98. It seemed like a cool company with a wonderful service, but it was still a risky bet: who knew people auctioning their junk online would become a global phenomenon?

Google is more like UPS: established, solid, recognized, respected. Its stock probably will repay investors over time — but the wise money will be waiting to buy it at a discount. All who get in on the IPO are guaranteed of paying full retail.

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