The Despair In Google

By Dr. Duru written for One-Twenty

February 2, 2006

Today's lesson in panic and despair is none other than GOOG. Today, Google's CFO George Reeves revealed a little more than Wall Street wanted to hear. The basic headline is that GOOG thinks that its days of heady growth are behind it. For a stock with a valuation that prices in heady growth and for a stock where investors have to maintain heavy doses of faith in lieu of definitive earnings and/or revenue growth, any combination of the words "slower", "growth", or "law of large numbers" is an excuse to sell first and ask questions later. Sure enough, GOOG was down as much as 50 points on the day before trickling back up to recover half that loss.

Unlike the patterns of panic that typically represent buying opportunities, the latest despair in GOOG is real cause for concern. In this case, a company executive actually came out and made comments that can be legitimately interpreted as negative for the stock (even if not necessarily negative for the company). There is nothing positive about an executive willing to make comments that clearly will destroy his stock. You cannot spin this into an excuse to buy until you get more information. Unfortunately, Google does not provide guidance, so this current slip into the world of guidance may not be corrected anytime soon. (Early Wednesday morning correction: Google DID bother to try to clean up the CFO's comments, albeit in three curt sentences. The last sentence in particular seems relatively consistent with the gist of what the CFO was saying in the first place: " we have stated in our SEC filings, our revenue growth rate has generally declined over time and we expect that it will continue to do so as a result of the difficulty of maintaining growth rates on a percentage basis as our revenues increase to higher levels"). I am sure investors and traders are hoping for relief at an analyst day conference March 2nd, but don't count on it.

So, while you wring your hands until that meeting, let us take a look at the price action. For those of you who do not believe technical analysis amounts to much, watch carefully here. You will see Google tag THREE, count them THREE, important technical levels on a day when traders were presumably slinging stock blindly and with blind fury and with little thinking at all. (We won't quibble with a few pennies here and there).

The daily chart above shows that GOOG bounced perfectly from the exhiliration of reaching for $400 again to the terror of kissing the 200 day moving average again. Both are technical levels. The $400 is magic more because it is a conveniently round number. After GOOG reported earnings in January, I claimed that $400 would loom more important than we could copmrehend at the time. So far so good on that prediction. Also note how easily it bounced up from $400 three times from November through January.

Now, pay close attention. The 20 day moving average, also known in this case as the middle Bollinger Band, sits at about $379. Let's see what happens to this level intra-day....

Amazing how that works! GOOG's recovery stopped cold right under the 20 day moving average! Where GOOG goes next is anyone's guess. Even if you are not asking for my opinion, I will claim that this stock is "done" for now. The Google conviction has been severely tested, and buyers are getting exhausted. The negatives in the story are becoming overwhelming. My sentiment has obviously turned sour, but it is towards Google the stock and not the business. Only when I see some true "give-up" in this stock will I even dare to speculate about this stock getting back over $400. My $400 price target for the year remains intact. (See my disclaimer here.)

Be careful out there!

DrDuru, 2006