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Google smart money is still on the bench
Investors should let the VCs cash out before jumping into the stock.
August 30, 2004: 3:40 PM EDT
By Eric Hellweg, CNN/Money contributing columnist

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BOSTON (CNN/Money) - Thinking about getting in on Google? For many investors, the temptation is strong.

Google is routinely mentioned alongside tech stalwarts such as Amazon, eBay, and Yahoo!, and who wouldn't like to have bought those stocks a few weeks after they went public? They were considered expensive too, remember?

'Tis true, and at north of $100, Google shares are already out of many individual investors' reach.

Reason to wait

Here's some reassuring news for them, then: Investors who haven't already bought into Google would do well to wait. Not because the company is in any trouble, but rather because of the large number of shares -- 271 million -- that could come onto the market during the next 180 days.

On Thursday, 4.7 million more shares will be eligible for sale; those will be followed by 39 million additional shares approximately two and a half months later.

Typically, 180 days pass before insiders' shares are eligible for sale. Because of the size of Google's IPO (271 million shares outstanding, with a 100 million share float) and because, well, Google is a little different, it has staggered the eligibility dates.

That's a wise move, since dumping 271 million shares on the open market all at once would create downward pressure on the stock simply because of the law of supply and demand.

With no quarterly earnings information released since the IPO, Thursday's newly eligible shares could create volatility for the stock. Although 4.7 million may not sound like many shares, that figure represents 75 percent of the average daily volume for Google stock last week. By Nov. 19, roughly 90 days after the IPO, the total new shares eligible for sale will increase the pool by a full 50 percent.

"There's much more downside risk in the stock between now and Thanksgiving, and unless Q4 is blowout, at least until Valentine's Day [when the full allotment of shares is eligible for sale]," says Martin Pyykkonen, a senior analyst with Janco Partners. Pyykkonen has a "sell" rating on the stock right now. (That February allotment is a killer: 176.9 million shares ready to go.)

Patience may pay off

Of course, much of the anticipated volatility is based on the assumption that those shares will hit the market right away. But you've got to figure that the venture capitalists who'd filed to sell in the IPO but withdrew when the stock was priced at $85 would be willing to sell some.

The November round of share eligibility will likely go to more rank-and-file employees, many of whom have been with the company for six years or so and probably wouldn't mind an opportunity to liquidate in order to buy the requisite Porsche and million-dollar mansion.

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The stock is trading around $106, with a price/earnings ratio of 146. But when the November eligibility date passes, investors may want to consider scooping up some shares if the price dips because of a glut of new shares.

The company will have filed its first post-IPO earnings report, and investors should have a more substantive view of its growth prospects. More conservative Google investors (if "conservative Google investor" isn't an oxymoron) would do well to wait until after the February eligibility date passes.


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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.