Harry Chen Thinks Aloud

After seeing shares of Google stock price hitting all time high, a friend asked me if I own shares of GOOG. I reply “yes. And do you?” “No, unfortunately. I own shares of some index fund,” he said. “So you probably own GOOG”, I laughed.

Like my friend, I don’t directly own share of GOOG in my investment portfolio. I own shares of an S&P 500 index fund and which makes certain amount of investment in GOOG. I’m happy when GOOG share price goes up, and I’m not too upset when it drops hard. This is why I think investing in index funds makes sense for most people.

Also, I think many mutual fund owners don’t aware how their mutual fund works. This can be dangerous because they may end up overweighting shares of certain high-profile stocks like GOOG.

MarketWatch reports that Google is to be added to S&P 500 Index, replacing Burlington Resource Inc. This is a good news to those who want to invest in Google but doesn’t want to buy Google stocks directly.

Since GOOG will be part of S&P 500 Index, investors can own shares of GOOG by investing in index funds that tracks S&P 500 index (e.g., Vanguard 500 Index Fund).

I think in the near future, investors should see a minor increase in the stock price of GOOG since all mutual funds that track S&P 500 index are forced to re-balance their portfolios to include GOOG.

MarketWatch kindly informs us that GOOG share fall as much 19% in after-hours trading.

Shares of Google (GOOG) tumbled as much as 19% in Tuesday’s after-hours session following the Internet company’s lower-than-expected earnings report. The stock briefly changed hands at $352 vs. a regular-session closing price of $432.66. At last check, Google rebounded to $370.93.

My feeling is that this marks the beginning of GOOG price reality check. Most of Google’s income comes from online advertising. There is little doubt that it’s adSense business is growing. But one must ask the question “can Google sustain this kind of profit growth in the years to come?” I’m skeptical about this, unless it comes out with some new killer-apps (e.g., Goobuntu).

Not that I’m recommending people to short sell GOOG, but I do think Google’s stocks are overpriced and too risky. Analyst Scott Kessler has downgraded Google’s stocks from HOLD (3 stars) to SELL (2 stars).

Based on our forecasts of modestly stronger revenue growth and better operating leverage, we are raising 2005 and 2006 earnings per share (EPS) forecasts to $5.84 and $7.91, from $5.80 and $7.62. But our 12-month target price stays $428. We think Google still faces notable risks, including revenue concentration, rising competition, and click fraud. Google also announces the proposed purchase of dMarc Broadcasting, a provider of digital solutions for the radio industry, in a deal valued at up to $1.1 billion. Pending approvals, we see a first quarter closing. We think the deal reflects Google’s need to diversify.

I used to abhor ads on the Web. Now todays content ads don’t bother me as much as before. As you can see I have Google ads on my site, you know I don’t hate them.

So the question is what has changed my mind about ads? Google AdSense. In the past, a lot of ads on the Web are pop-up ads with flashy images and logos. Most of the time, those ads are completely unrelated to the site that I was visiting. Remember those days when you visit a news site, an X10 ads would pop up right in front of your face…

That was then. With Google AdSense, ads have been a lot more polite and less intrusive. I even hear my friends saying that sometimes Google ads are useful in finding services that they are looking for.

Here is something that you might not know. Google AdSense is fueling is a growing market of entrepreneurs that profit displaying Google ads. According to this IHT article, it’s not usual for a site with 15,000 user base to profit $10,000 a month from Google AdSense.

Five to tens years ago, it was almost impossible for a person to make that much money just by working in a small office with a laptop (except day traders). If you think about it, Google AdSense has created a completely new occupation. The sole function of this occupation is to increase site traffic and serve more ads.

If you think you have missed out on Google’s stock bonanza, perhaps you can start with Google AdSense. Make some money and then go buy its stocks.

If you want to learn more about how Google AdSense has changed people’s life, read Trickledown payoff from Google