Google shares pass $500 mark

Google’s shares topped $500 for the first time on Tuesday, as Wall Street put aside the qualms about excessive valuation that have dogged the stock for nearly a year and looked ahead instead to another burst of growth from the world’s biggest internet company.

The latest surge in Google’s shares, which have jumped by 37 per cent from a summer low, also caps the company’s emergence as the chief rival to Microsoft and confirms how far its fortunes have now eclipsed those of Yahoo.

Google shares ended Tuesday’s session 3 per cent higher at $509.65.

At $153bn, Google’s stock market value has now risen to more than half that of Microsoft, while its fast-growing revenues and cashflow already equal a quarter those of the tech industry’s most profitable company. Meanwhile, the latest rally means it is now worth more than four times as much as Yahoo!, which has struggled this year to build a search engine advertising system capable of keeping pace with Google.

While analysts cautioned that breaking the $500 barrier did not in itself mark a meaningful change in how investors view the company, it has symbolic value after a year in which Google’s escalating stock price lost some of its momentum.

The shares were priced at $85 when the company went public in August 2004 and by November last year had soared to $400. After hitting more than $470 early this year, though, they floundered, as investors started to anticipate slowing growth and rising competition.

While the shares have jumped more than five-fold since its initial public offering, its rapid growth since then has now allowed it to “grow into” its valuation, according to Youssef Squali, an analyst at Jefferies in New York.

However, the different lenses through which Wall Street views stocks like Google leave very different impressions of whether the shares are still good value.

According to Mr Squali, the company is now valued at around 21 times its expected 2007 cashflow, roughly in line with the level when it went public, and reasonable given its continued rapid international growth. However, according to Scott Kessler, an equity analyst at Standard & Poor’s, the company is trading at 57 times its expected net income for this year, after adding in employee stock option expenses – a figure that many analysts leave out when judging tech companies.

Thanks to the sheer size and eye-catching growth of the company, mass psychology has now taken over and is the main force driving its shares, according to some analysts.

“A lot of people feel not only that they will lose out, but they will feel and look stupid” if they do not own the shares, said Mr Kessler.

The same herd mentality could produce an equally powerful reversal if Google starts to show signs of a more rapid slowdown, added Mr Squali. “At the first sign of weakness, investors will be running for the hills,” he said.