updated 6/14/2005 1:00:06 PM ET 2005-06-14T17:00:06

It now seems like a distant memory. Last summer, Google Inc. slashed its asking price for shares in its initial public offering by 30 percent to $85 a piece to attract more demand.

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Who would have thought that 10 months later the stock of the Internet search engine provider would be closing in on $300 a share, giving it a market capitalization of more than $78 billion. What’s more, many analysts don’t even think that’s where it will top out in the coming months.

Does Google sound like a stock bubble? It’s too soon to tell, but worries over that isn’t doing much to deter investor interest.

Since it went public last August, Google has defied expectations. Sure, this company was touted as one of the biggest IPOs in recent history not just for its size — it was the fourth largest stock offering in 2004, according to Renaissance Capital’s IPOhome.com — but also for its well-known brand name.

No one anticipated this kind of bullish response for its stock, however.

That’s because investing in Google has risks — they existed when it went public and they continue today.

For one, Google directly competes with more established companies such as Yahoo Inc. and Microsoft Corp., so even though it is the dominant search engine now there is no guaranteeing ever-rising profits in the future. Google also derives nearly all of its revenues from paid search, and has yet to see any of its other products become financially meaningful to the bottom line.

It was those kind of worries that many speculated led Google, just weeks before the IPO, to lower the target price for its stock from $108 to $135 a share to $85 each.

But Google so far has proven demand for its stock is certainly there, and has made early investors very, very rich at least on paper. The stock jumped from just over $100 a share on the first day of trading to $120 about a month later to more than $200 by the start of this year. Google now trades around $280 a share, and there have been days that it has closed in on $300.

And there is much talk on Wall Street that the stock has more room to grow. In recent weeks, analysts at Credit Suisse First Boston, Piper Jaffray and others have upgraded their outlooks and price targets for Google’s stock. Earlier this month, Citigroup’s Smith Barney initiated coverage of Google with a “buy” rating and a target stock price of $360.

Of the 21 analysts who cover the stock, 80 percent rate it as a “strong buy” or “buy,” a big jump from the 18 analysts who covered the stock in March of which only 60 percent had a such ratings on Google, according to Zacks Investment Research.

Non-search services
Many analysts believe that Google will find success expanding its non-search services, including maps, news and e-mail. Others think that the stock looks fairly valued or undervalued compared with its peers.

That was something noted by CSFB analyst Heath Terry, who recently raised his price target on Google stock from $275 to $350 a share. He said that Google is trading roughly 42 times the investment firm’s 2006 earnings estimate compared with Yahoo’s forward price-earnings ratio of 55 and eBay Inc.’s p-e of 37.

“We would argue because of its superior growth rate, Google should trade at a premium to both companies,” Terry said in a note to clients.

Many also believe that Google’s shares are getting a lift from rumors that the stock could be added soon — maybe even by the end of the summer — to the Standard & Poor’s 500 stock index. Should that happen, institutions would need to buy the stock, which would likely drive the price higher for the short term.

In addition, the stock has benefited from lots of investor interest in technology stocks in general in recent months.

But all this bullish sentiment is exactly what has some market-watchers worried and is causing some talk of a potential Google-stock bubble. As contrarian theory goes, sometimes too much good news is really bad news for the stock.

Earlier this month, S&P Internet equity analyst Scott Kessler downgraded Google stock from “buy” to “hold.” He still thinks that its shares have room to grow, but only by about 10 percent over the next 12 months.

Kessler points out that not much has changed fundamentally for the company since it reported better-than-expected earnings on April 21, yet the stock has soared — gaining nearly 40 percent in less than two months.

“A lot of the good news is already factored into the stock,” Kessler said. “The stock has had such a strong run, my concern is that the expectations are too high for that to continue.”

Also concerned is Martin Pyykkonen, who covers Google for the investment firm Janco Partners Inc. in Denver. He questions what will happen to Google if and when it gets in the S&P 500. Since rumors began circulating in late May about that possibility, the stock has surged more than 17 percent.

“The stock probably won’t crater, but there will be some down draft and there will likely be limited upside from that point on,” he said.

Still, Google investors don’t seem deterred — for now. Who knows how long they can stay that way?

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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