Remembering The Google IPO
Hard to believe, but Google (GOOGL) had it’s IPO 10 years ago today. This event was met with an extreme amount of skepticism and doubt. Could a search engine with no real profits even work? Sounds silly now, but a decade ago very few thought this company would even work - let alone become one of the largest companies in the world.
The shares went public at $85/share, which was the low end of the range - making it an immediate disappointment in the eyes of many. Shares gained +18% that first day, closing at $100/share. Sounds good, but not the huge gains some had hoped for given this was the biggest tech IPO since the tech crash a few years earlier.
Leading up to the IPO, the company had a good deal of drama. My favorite being a Playboy magazine interview which drew the attention of the SEC. Apparently the SEC actually reads that magazine.
“I’m not buying,” said Stephen Wozniak, an Apple (AAPL) co-founder. “Past experience leaves the taste that a few people — never ourselves — will make out the first day, but that it’s not likely to appreciate a lot in the near future or maybe even the long future,” he said.
“Only time will tell if the company can fend off efforts by Yahoo (YHOO) and Microsoft (MSFT) to build superior search engines,” said the New York Times.
The big question at that time was the $27 billion valuation. The shares are worth $400 billion today by the way.
"To see a market capitalization valuing Google as a mature company is assuming a best-case scenario which isn’t a for-sure outcome. It still has a long way to go to justify growing into that kind of market value," said Michael Cohen, director of research with Pacific American Securities.
Sure there might have been a few GOOGL bulls out there, but the masses wanted very little to do with this one.
So August 2004 had a flurry of ‘overvalued’ articles - Google it if you want. Then by October 2004 the analysts had just 36% ‘buy’ ratings on it. Now here’s the beauty of what can happen when you have a lot of negative sentiment that doesn’t play out - it can spark huge rallies. In the face of all of this negativity, the shares doubled by the end of 2004.
After doubling again in 2005, there was a brief pullback in early 2006 and this sparked a ‘Gurgle’ Barron’s cover. This one marked the calendar year low and the shares eventually soared to over 700 by late 2007.
By now, everyone loved the company. Funny how that works. Analysts now had 91% buys (it was just 36% in October 2004) and tech was a consensus favorite sector heading into 2008. Remember, around the time of the IPO no one trusted tech after the tech bubble implosion. Add it up and the overall sentiment picture had totally flipped. That by itself wasn’t a reason to turn bearish, but it was a reason to worry.
Then it happened, in late 2007 BusinessWeek had a very bullish cover titled “Google’s Next Big Dream.” Expectations were simply too high for any company at this point. Any little mistake could lead to a waterfall of selling.
The shares began to underperform in early 2008, yet analysts now defended the shares. Option activity continued to show heavy call buying, so a ‘pick the bottom’ mentality had set in. These were much different that the attitude on the way up and said something had changed.
Over the next year or so the shares dropped more than 65%.
This example has officially gone down in history at how fading the consensus can be a very powerful tool when it comes to trading. Things don’t always line up this well, but when they do it can lead to spectacular gains.
Picture courtesy of Keso.