Five Years Later, Google Proves the Skeptics Wrong

Wall Street Journal August 20, 2009

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It is time to wish Google a happy anniversary. Five years ago today, Google went public.

Given the impressive returns over the years, it would be easy to forget the stumbles, the criticism and the questions that marked what is now the decade’s most notable IPO.

In 2004, Google tried to reshape the IPO process. Instead of the conventional form, Google poked a stick in Wall Street’s eye by opening the bidding process to an auction in an attempt to put more of its shares in the hands of small investors.

For its intransigence, Google’s IPO was roundly criticized. The process was marked by several public missteps–the Playboy interview for one–tepid interest by big institutions and small-investor aversion to the IPO’s initially high price range. In the end, Google had to lower the offer price 37%. A WSJ article on the day of the IPO quoted one hedge-fund manager as saying, “They managed to tee off the broader constituency of Wall Street, and it’s obviously hurt them. Wall Street wins again.”

The process wasn’t the only thing stirring skeptics and critics alike. Many an investor and market commentator found fault with the offer price and questioned Google’s growth prospects. And who could blame them. The bursting of the tech bubble was still fresh in the minds of most.

Allan Sloan wrote for the Washington Post in early August 2004:

“I’ll offer up a piece of advice as I head to the beach: Don’t buy Google at its initial public offering.

If you want to own Google, wait until the dust has settled and the hype machine has moved on. Before the year is out, I’m sure, you’ll have a chance to buy Google for less than its IPO price. Possibly much less. So be patient. You’ll have to pay a brokerage commission on any shares you buy post-IPO (the initial distribution will be commission-free), but you’ll still come out ahead by waiting.

Why do I say this? Because Google’s IPO price is just too high to be sustained. The price, $108 to $135 a share, assumes that things will go swimmingly for years and years–and that almost never happens. That’s especially true when it comes to something like Internet search engines, where competitors can spring up like mushrooms overnight. Say, the way Google did.”

Sloan offered up his view before Google lowered its offer price, but he was hardly alone in advising investors to sit on the sidelines. Plenty of big investors said much the same thing, and the WSJ cautioned:

“IPOs often trade below their offering price within six months or a year after their launch and generally trail the market during their first few years. Yet many fund managers say that because Google used an auction to set its price, the company’s shares may not jump once trading starts.”

Less than a week after the IPO, Sloan was back from vacation and arguing that Google’s share price–at just over $109–was “insane.”

“At Monday’s closing price, the stock market is valuing Google at almost $30 billion, or almost 87 times the $1.26 per-share profit it reported for the 12 months ended June 30. Google earned $7 million on $86 million in revenue in 2001, its first profitable year, and $191 million on revenue of $2.26 billion in the 12 months ended June 30. But the company’s not a small start-up anymore. To keep up this growth rate, Google will have to earn $5 billion on revenue of $60 billion in 2006. That’s clearly not going to happen.”

Again, Sloan was hardly alone. A Janco Partners analyst slapped a sell rating on the company just a week after its IPO, raising concerns about how much cash the Web search firm would generate.

Today Google’s shares trade north of $440. That is a nearly 420% return over a time period during which the Nasdaq is up only 8%, writes Paul R. La Monica. So while Google’s IPO didn’t revolutionize the IPO process, there is little doubt that five years later Google’s IPO was a success for those that bought early.

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Name We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name. Comment Comments (2 of 2) View all Comments » 10:27 am August 20, 2009 Aaron wrote:

Perhaps you are literate in an language other than english?

1:42 am August 20, 2009 shrikantsharma wrote:

GOOGLEis themost important thing which has happened to me in my life after i became LITREATE that is i call a new eye sight has been provided to me and of cource my thoughts have improved scientifically many fold .I FEEL THAT PROBABLY THIS MUST BE THE CASE WITH SO MANY HUMENBEINGS. THE EVOLUTION OF MANKIND IS FULL OF SUCH EXPERIMENTS LIKE GOOGLE WHICH CHANGES THE KNOWLEDGE ARENA MANY TIMES BUT AFTER THE BIRTH OF PRINTING AND BOOKS ON PAPERS GOOGLE IS THE TALLEST AMONGST THEM.i congratulate on the 5th anniversary and WISH U A MANY MANY HAPPY RETURNS OF THE GOOGLE U R MY ONLY LOVE AFTER BOOKS WITHOUT U I MAY NOT BE ABLE TO LIVE,DREAM AND CREATE AN INTELLIGENT AND GLORIOUS LIFE.

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