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Investors Sour on Google

Google Inc.'s (GOOG) stock price dropped by more than 4 percent Monday, accelerating a recent shift in sentiment that has caused once-ebullient investors to become more circumspect about the online search engine leader.

Barron's cast the latest pall on Google with an article outlining several risks that threaten to squeeze the company's profit margins and cut its market value in half.

The gloomy scenario further dampened investors' enthusiasm for Google, whose market value has plunged by 27 percent during the past month to wipe out nearly $40 billion in shareholder wealth. Google's shares fell $16.91, or 4.7 percent, to close at $345.70 on the Nasdaq Stock Market. The shares peaked at $475.11 on Jan. 11.

Since its stock reached that high, Google has released a fourth-quarter earnings report that didn't live up to analysts' lofty expectations and alienated some of its users by launching a censored version of its search engine in China to adhere to that country's government restrictions on free speech.

Those developments have contributed to an abrupt change in perception about Mountain View-based Google, which began 2006 as a widely revered Internet icon that seemingly could do no wrong as its shares soared from their August 2004 initial public offering price of $85.

Now, Google is increasingly being viewed as a company vulnerable to stiffer competition as well as its heavy reliance on advertising revenue growth that could taper off as companies become more sophisticated about online marketing.

Barron's critical piece, which warned Google's shares might drop to as low as $188, provided a textbook example of how the pendulum has swung against the company.

Many of the potential problems detailed in the Barron's article also loomed as possible pitfalls during 2004 and 2005, William Blair & Co. analyst Troy Mastin reminded investors in a Monday research note.

"While we agree that the company is facing more headwinds today than last year, most of the fundamental issues raised by Barron's are not materially different than 12 or 18 months ago," Mastin wrote.

Most other analysts echoed Mastin' sentiments, continuing to describe the recent downturn in Google's stock as a golden opportunity for bargain hunters.

"The simple takeaway is that Google owns the best fundamentals in the Internet sector," Citigroup analyst Mark Mahaney wrote Monday, reiterating his belief that the company's shares will bounce back to as high as $490 during the next year.

Another prominent Internet analyst, Safa Rashtchy of Piper Jaffray, believes Google's shares will reach $600 by the year's end.

Google has continued to enthrall most analysts even as the company's management is ambivalent about Wall Street's opinions. "The company isn't run for the long-term value of our shareholders but for the long-term value of our end users," CEO Eric Schmidt said during an interview published in this week's Time magazine.

Like Google co-founders Larry Page and Sergey Brin, Schmidt has pocketed huge windfalls since the company's IPO. Combined, the three executives have sold about $3.7 billion in stock.

The early run-up in Google's stock price has been driven by Google's Internet-leading search engine, which has become the hub of the Web's largest advertising network. As more advertisers shift their spending online, Google's annual profit has ballooned from $7 million in 2001 to $1.5 billion in 2005.

Both Yahoo Inc. (YHOO) and Microsoft Corp. (MSFT) have been aggressively investing in improvements in their own search engines to catch up with Google, but those efforts haven't paid off so far.

Google ended December with a 48.8 percent share of the U.S. search market, up from 43.1 percent in the prior year, according to Nielsen/NetRatings Inc. Yahoo ranked second with a 21.4 percent share, down from 21.7 percent in the prior year, while Microsoft's MSN held a 10.9 percent share, down from 14 percent.

In an inkling of how competitive the market might become, both Microsoft and Yahoo have recently indicated they are considering offering financial incentives to Web surfers who agree to use their search engines instead of Google's.

Google pessimists are also worried that advertisers will gradually lower the prices that they pay to have their messages displayed alongside specified search requests, such as "vacation" or "computers."

Recurring problems with mischief makers who maliciously click online ads with no intention of buying anything — a practice known as "click fraud" — also loom as a stumbling block for Google.