Wednesday, March 29, 2006

Google(GOOG) Secondary Stock Offering

The CNN Article details Google's plans to do a stock sale of upto 5.3 million shares raising 2.1 billion dollars at current prices.

Companies sell stock primarily if they are over values. Companies use stock as a currency to make deals when the stock is over valued. Warren Buffett used Berkshire stock instead of money to buy General Re as he though the Berkshire stock was over valued. In Google's case, not only does the company think the stock is over valued, the company leadership also seems to think the stock price will decline further in the coming couple of years.

The competition is definitely going to heat up in the second half of this year and next year. In the prior article we discussed Google and Yahoo and found that a price of $340=00 provided a rough upside comparable to investing in U.S treasuries for the next two years. Given that the sale of 5.3 million shares will dilute the shares by about 2%, the target price in 2008 falls to 372 dollars.

In the previous segment we talked about the possible down side to Google stock. This included competitive pressures as well as stock dilution. In after hours trading, the stock was selling for $382=00. While stock price tends to overshoot in after hours trading, I believe this is a good opportunity for people that bought the stock in the 280-330 range to unload some of this stock and do some profit taking. A return of 9.725% can be achieved by investing the profits in treasury bonds with zero risk. As our analysis shows, there is little upside to Google at current prices. While the stock will likely continue to be volatile with more gyrations in the upcoming months.