Google Agonistes

The fall of Google stock, which was inevitable and long-delayed, will continue. As Henry Blodget points out when arguing that the most recent quarter "wasn't so bad" (and, indeed, it wasn't, but it also wasn't a home run from a company expected to put up Barry Bonds numbers):

At $345, the company's enterprise value has dropped to around $100 billion, or 35 to 40 times 2006 estimated free cash flow of $2.5 billion to $3.0 billion.  That's getting closer to a 30-40X range that seems reasonable based on what we know today.

Is there more potential downside?  Absolutely.  More deceleration could knock another 25% off the multiple, and this year's accounting changes and investments could make even $2.5 billion of free cash flow challenging.  And that's not even mentioning what would happen if the company was whacked by click fraud.

That would put GOOG shares at exactly the $260-a-share-price I called for at the end of 2006. I'm sticking with my prediction. The reason for the fall is not going to be click fraud, but decreasing user trust with Google's ever-expanding personal data land grab and the accompanying skyrocketing costs of development and operations that come with so many new initiatives.

If, as Blodget suggests it might, Google pulls the trigger on "annoying" but profitable ad placements, it will only make the customer retention challenge harder.