Google: bubble to bulls


Almost six years since the Internet bubble burst, new media is all the rage again judging from the recent stock performance of a couple of behemoths: Google Inc. and Apple Computer Inc.

On Tuesday, shares of each soared to all-time highs, and the Nasdaq closed at its highest level in more than five years, though the tech-heavy index does that fairly often nowadays.

Google, enjoying its widening lead in the surging Internet search-word advertising business, saw its shares leap 3% to $509.65, busting through the $500 threshold just a year after doing it similarly to the $400 level. Not bad for a company that went public in August 2004 at $85.

Google was the top advancer Tuesday on The Hollywood Reporter's Showbiz 50, while Apple's nearly 2.5% run-up was second on the index.

Apple, meanwhile, is benefiting from the popularity of its music-industry combo play of iPod and iTunes. Observers have been estimating that Apple, run by CEO Steve Jobs, will sell about 14 million iPods in the current quarter. American Technology Research analyst Shaw Wu is predicting that an iPhone — with iTunes and text-messaging capabilities — is being readied for the market.

Apple shares rose 2.5% on Tuesday to $88.60. The stock has risen about elevenfold in three years. Back then, when its shares traded for just $7 apiece, Apple was seen as a second-tier computer maker, not the pioneering company that would alter the landscape of digitally delivered music and, perhaps someday, video.

In 2003, when iTunes launched, $25 million worth of songs in the U.S. were digitally downloaded, legally, from the Internet. This year it will be $693 million, and by 2010 about $1.7 billion, according to PricewaterhouseCoopers, and Apple is by far the undisputed leader in the category.

Some have theorized that the ascent of Apple's shares in just the past few days might also be attributed to slower-than-expected sales of Zune, the just-released Microsoft Corp. product that competes with the iPod. If that's the case, though, it doesn't seem to be hurting Microsoft too much, as that company's shares also are hovering near a 52-week high.

That shares of Google, Apple and Microsoft have been on fire since about mid-summer doesn't surprise professional investors.

"Contrary to popular belief, they don't compete against each other," said Cody Willard, a hedge fund manager who owns shares of all three. "They compete against the physical world. And they're all going to continue taking huge market share."

Perhaps that's why, as of Tuesday, Google sported a market capitalization of $156 billion, larger than that of Time Warner Inc. and the Walt Disney Co. combined. Apple's market cap was $75.7 billion, $10 billion more than Disney but about $7 billion less than Time Warner.

Naturally, not all new-media companies are enjoying stock surges. Many that are seen as competitors to Google and Apple — in one way or another — have seen their share prices significantly lag.

Yahoo! Inc., a Google competitor, saw its stock rise 1.6% on Tuesday to $27.14, though that's far from its 52-week high of $43.66 and nowhere near the $100 mark it traded at six years ago.

Likewise, shares of Napster Inc., an Apple competitor, have been in a funk for a couple of years, lifted only recently by word that the company might be for sale. Its shares sunk 1% on Tuesday to $3.01, off from a 52-week high of $5.10.

Satellite radio stocks, which often are lumped into the digital-music category that Apple dominates, also have just recently bounced off the bottom of their yearlong trading ranges. Sirius Satellite Radio shares closed down 1.2% on Tuesday to $3.97, well off a 52-week high of $7.98. XM Satellite Radio stock rose 1% on Tuesday to $14.62, down from a 52-week high of $32.

Because of its seemingly lofty price, Google, more so than Apple, is sometimes pilloried as a bit bubbly. Although unlike that era more than a half-dozen years ago when investors couldn't get enough Internet stocks regardless of price, Google shares trade for a reasonable 41 times the company's estimated 2007 earnings, according to Citigroup analyst Mark Mahaney.

In fact, because of climbing profit expectations, "Google has actually become less expensive over the past 12 months," Mahaney said.

Mahaney has a $600 price target on Google shares, which would make it about a $190 billion company, about $5 billion more than the combined worth of Time Warner, Yahoo! and Disney, based on Tuesday's closing prices.

The analyst seems particularly bullish on Google's work in "behavioral targeting" of online ads, whereby more ads are served to Internet surfers who have a history of clicking on them as opposed to those who routinely ignore them.

"If successful, we believe this initiative could positively impact click-through rates on Google," Mahaney said.