Google Inc. became the unexpected darling of Wall Street when stock in the Internet search engine skyrocketed over the past two years to a peak of nearly $472 a share.
In recent weeks, however, the company whose philosophy holds that you can be serious without a suit and make money without "doing evil" has seen its market fortunes shift. Yesterday, the stock closed at $342.38, down more than $129 from its January high.
Google's rise and fall can be attributed in part to overzealous investors who, in a flashback to the Internet bubble of the late 1990s, were willing to overlook risks to the company's business model, analysts and industry experts said. The wild ride also comes as Google has become entangled in controversy, such as efforts by the Chinese government to censor the Internet, an issue that led lawmakers to call executives from Google and other companies to Washington yesterday.
But in a broader sense, Google's market stumble might be a foreshadowing of the knocks the company will have to take as the world's most-used search engine.
Despite its do-gooder credo, Google could face a fate similar to that of Wal-Mart Stores Inc., McDonald's Corp., Microsoft Corp., and other groundbreaking giants that rose to dominance in their industries and then met with suspicion.
"For the longest time, Google was the magical and untouchable company, and so investor confidence hasn't reflected all of the realities," said Jim Harper, director of information policy studies at the Cato Institute, a Washington think tank. "It's just a natural progression. If you're successful, you're going to get someone to hate on you."
One need not look further than the Internet to find Google detractors. The Web site, google-watch.org, for instance, posts cartoons lampooning the company and references to Google as an Orwellian "Big Brother."
Google has faced some of its harshest criticism for its recent decision to launch a version of its search engine in China that excludes information censored by the Chinese government, following similar decisions by Yahoo Inc. and Microsoft. Cisco Systems Inc. has sold filtering equipment to China, which has come under fire for human rights abuses.
In moving into the lucrative market, Google said it sought to satisfy the interests of users, expand access to information and respond to local conditions. The company also said it will tell users when content has been blocked.
Rep. Christopher H. Smith, a New Jersey Republican, said in an opening statement for the congressional hearing that Google, Yahoo, Cisco and Microsoft "have compromised both the integrity of their product and their duties as responsible corporate citizens. They have aided and abetted the Chinese regime."
On Tuesday, Tibetan groups that agitate for an end to Chinese rule in the Asian region staged Valentine's Day protests against Google in London, Toronto and Mountain View, Calif., where the company has its headquarters. They posted their activities on noluv4google.com.
"For people who put themselves on a pedestal and say we will do no evil and then to start dealing with China under the Chinese-dictated terms, that would undermine some of the high ground they wanted to take," said Asher Epstein, managing director of the Dingman Center for Entrepreneurship at the University of Maryland's Robert H. Smith School of Business.
Google has won kudos from privacy rights groups for fighting a Justice Department subpoena for search records it says it needs to combat online child pornography, although the case has shed light on the fact that Google retains personal information on users.
The company also has become embroiled in legal tangles with the Authors Guild and the Association of American Publishers, who have sued over Google's plan to create a digital Internet library of printed books, alleging copyright infringement. In a separate development, the World Association of Newspapers has lashed out at search engines, particularly Google, that grab news from other sites and post it online.
Google's much-watched founders, Sergey Brin and Larry Page, have been under scrutiny as well. Critics take issue with Brin, who earned a bachelor's degree in mathematics and computer science from the University of Maryland at College Park in 1993, and Page for unloading billions of dollars worth of Google stock. Investors typically want top management to hold sizable stakes in their companies, and often take insider sales of stock as a sign that something might be amiss.
"For them to say we don't care about profits, we just want to generate a growing enterprise, well, they have the luxury to do that because they've already cashed in enough chips," said Andrew M. Schroepfer, president of Tier 1 Research, an independent firm.
Brin and Page continue to own Google shares, and they insist they aren't in business for the money. If that were their motivation, the former Stanford University classmates "would have sold the company a long time ago and ended up on a beach," Page said in a recent interview with Time magazine.
The two are known for espousing frugality, and both have owned the environmentally friendly, economically priced Toyota Prius cars, though they recently started using a refurbished Boeing 767 airplane for more extended travel.
At the same time, they have snubbed Wall Street ways. They refuse to give analysts any guidance on the company's quarterly earnings, saying they are focused on building the business over the long term and not on short-term profits. And when the company went public in August 2004, it cut out investment banks by selling shares directly to investors through auctions.
After critics sniffed that its initial stock price was too rich at $85, the stock zoomed past $200 by early 2005, past $300 by last summer and beyond $400 last fall.
Google, which attracts an audience of more than 80 million people in English-speaking markets and offers search results in 35 other languages, makes money through advertisements. Among the risks to that business is "click fraud," in which a person or automated software clicks repeatedly on an ad to drive up the ad bills of competitors.
Another risk has to do with keyword pricing, in which retailers and other customers pay higher prices for their names to appear higher on the list of search results. Analysts said Google's revenue might not rise as quickly if customers decide the rates have gotten too expensive and turn to either Google's competitors or other media to advertise.
Google got a taste of disappointing "the Street" two weeks ago when the company reported higher-than-anticipated taxes and spent more on marketing and infrastructure than analysts had projected for the fourth quarter. Though revenue nearly doubled, the number missed analysts' expectations, and the stock slid in an investor sell-off.
The earnings report came on the heels of two analysts - Scott Devitt of Stifel Nicolaus in St. Louis and Scott Kessler of New York's Standard & Poor's - downgrading Google's stock from "hold" to "sell" in mid-January, which spooked some investors.
"I think people were unaccustomed to seeing the words 'Google' and 'sell' in the same sentence," Kessler said.
"The magic is gone from the stock at this point," he added. "Whatever happens from here on, it's never going to be that way again."
Still, about three-quarters of analysts following Google recommend that investors buy the shares, and some predict the stock price will soar back toward $500 within the year. Both Stifel Nicolaus and Standard & Poor's have re-evaluated their positions and raised their recommendations back to "hold." Kessler said he expects the stock to be in the $390 range over the next year.
In spite of the recent, conspicuous stumble, many analysts say Google's prospects are almost as infinite as the Internet's.
This month, the company joined a group that included Skype Technologies SA to invest in Fon, a venture that's developing a network of wireless fidelity, or Wi-Fi, locations for Internet access.
Last month, Google announced plans to buy a broadcasting station for more than $1 billion, and the company has launched "Google Video," a clearinghouse for downloadable TV shows and movies. It also has Froogle.com, a comparison shopping service.