Adeo Ressi

Google, the defining stock of a second Internet bubble has officially collapsed today: March 4th, 2008.

The GOOG stock sank this morning to the $440 range, which means that, unless you bought stock before October 2006, you have likely lost money on your Google investment. In other words, a year and a half of value creation was eradicated, and, in my humble opinion, this is just the beginning. I have already advised my friends to look for a $425 price target with dips below the $400 level within the next couple of days.

A dark cloud now hangs over the search giant and many problems will start to compound themselves inside and outside the organization. For the best managers, the problems that Google now faces are nearly impossibly to overcome, but Google does not have the type of hard-nosed managers needed to avert further collapse. The very unbridled optimism and originality that created tremendous shareholder value is now the enemy to present day stock performance.

The first problem is morale within the organization. By the end of this month, top Google talent will be sending out resumes or looking to return to their scientific training at Universities. The chrome plating has chipped off, and the great minds that Google has attracted do not stand to be heroic millionaires in a idyllic organization. Instead, they face the realization that they are well paid functionaries in a machine that is starting to resemble any other company. Worse, many are probably facing personal financial losses on the hedging, borrowing, and other vehicles employed to translate wealth "on paper" into homes, food, gas, and cars.

Second, the nervousness around the offices worldwide, as employees speak with their respective bankers while glued to the falling red numbers on Google finance, leads to a massive cross-company productivity loss. Teams are now working at 50% to 60% capacity and managers are working at even less. Stories of amazing personal losses are being told around the water cooler, as code for new functionality sits in repositories untouched and unreleased.

Third, the fast declining stock price breezing through fixed and arbitrary sale thresholds: short positions, large institution price targets, lower boundary employee hedge positions, personal investor pain levels, etc. Each time that the stock settles at new 52 week lows for a day or two, there is a large institution plotting to liquidate some or all of their GOOG holdings. Of course, these institutions can not just blanket dump the stock, so their traders are slowing pumping shares into the market, along with everyone else.

Fourth, there are not any "real" buyers for the flood of GOOG stock hitting the market. Most of the stock gets eaten up by bright-eyed and opportunistic value investors looking to make a quick buck in the volatility. I cannot imagine any wise institution that is looking to buy into Google with a P/E ratio greater than 33 based on advertising model during a global recession.

Right now, a giant has fallen and will likely be down for the count. There are some things that can be done to avert disaster, but none of them underway, so the dark days at Google are just beginning.