Google's Stock Is Getting Close to Its Tipping Point

There is a pretty common phenomenon that takes place with ultra-hot, ultra fast growing tech stocks.

Earnings keep growing exponentially quarter after quarter. With each quarter of growth comes more fresh money into the stock, as common investors, hedge funds and mutual funds all plow into the stock. Each quarter investors worry about whether or not the company will beat its earnings, and each quarter the company manages to beat their earnings. The stock will rise steadily quarter after quarter, the outlook will continue to get brighter, analysts will fall over themselves upgrading the stock and raising their targets and then..

Boom. It happens.

The company announces quarterly reports that are just OK. Not great. Not spectacular. Not a blowout. Just alright. Investors, so used to explosive earnings reports with breathless analysts pounding the table on the stock, can't believe it. Don't worry about it, they say. The company will report great earnings next quarter, and the stock will go right back up. Maybe they do. Maybe they don't. If they do report great earnings, the problem is that nearly everyone in the world already owns the stock. You don't have that big new surge of new money into the stock to propel it higher. And if the stock reports two straight quarters of just "Meh" earnings, then watch out below. The growth stock turns into just another stock. And who really wants to own a $100 Billion dollar company that is "Just another stock?"

This happened to Qualcomm. It happened to Ebay. It happened to Amazon.com. And it's happening to Google right now. What you are witnessing with Google is the change from a hyper-explosive growth stock to a stock that really won't be able to press much higher. Expectations are so high, and so many people own the stock, that there is not much room to move higher. The problem with explosive earnings and revenues growth is that there comes a point where you just can't grow your earnings and revenues 40% each quarter every quarter. Eventually you become so big that the growth slows down. It's just the way it goes.

Google is currently trading at about $505. It has had a great run. If I owned it, I would sell it. It's all about risk/reward. Does Google have a better chance of going up to $600 or down to $400? To me, the answer is easy. This has happened too many times in the past, and will happen again with Google. It's inevitable.

Filed under: Internet Companies