Barron's Online - In the Drink

"INVESTORS HAVE BEEN FIXATED on Google the past few weeks, as its shares have tumbled nearly 25% from a peak of $475 -- and the fact is, there could be a lot more tumbling ahead. The share price could well be cut in half over the next year as the Internet giant grapples with growing competition from Microsoft and Yahoo!, increased pricing pressures in its online ad sales and mounting concern about what's known as click fraud.
Suffice it to say, there are those who disagree: Fans insist that Google (ticker: GOOG) is headed to $500, maybe even $2,000. But the list of challenges the company faces is nothing short of mind-googling. As if Microsoft weren't enough, the search concern is headed for brawls with content providers like newspaper and book publishers. Phone and cable firms may also join the fray. Google's cost structure, meanwhile, is ballooning, with the company hiring thousands of new workers and mulling projects as far afield as space travel. If Google trips on even a few of the challenges, its earnings could easily disappoint.
To get a sense of what might happen to the stock, we gave one �ber-bull's 2006 revenue estimate for Google a 20% haircut, trimmed his projected expenses by 5% (but no further, because bulls greatly underestimate Google's costs), deducted stock-based compensation and, generously, gave the company credit for the considerable interest income on its cash. The result: Earnings would be 30% lower than the bull's projection, at $6.28 a share. If the stock were to maintain its current multiple of 41 on those lowered earnings, it would be worth $257. It's more likely the multiple would shrink to as low as 30, in line with the slower growth. That would make the stock worth $188, versus its recent $360"