Google's Tough Week

The last seven days won't exactly go on Google's highlight reel. In fact, unless the market does something awfully dramatic in the next few minutes, the company's stock will close the day below $300.* Google's execs started last week chortling over the prospect of Microsoft and Yahoo teaming up for a Hail Mary in search, and sparking frenzied rumors about buying Twitter. Now, they're watching their stock value drop back down to earth and joining the rest of the world in the new economic reality.

It all started when CEO Eric Schmidt warned that the economy was so dire that even Google was "not immune" to its effects, which spooked even investors who were used to Schmidt's historically modest assessments of Google's prospects. Over at Silicon Alley Insider, Henry Blodget claims that according to a source inside Google, the last month has been a disaster, with revenue growth suddenly and rapidly decelerating. Blodget points out that while 2008's fourth-quarter revenue grew 25 percent at Google, the first-quarter growth is projected to drop down to 10 percent, with more pain to come in the second quarter. Moreover, Blodget claims that Wall Street's estimation that Google will pull out of this by the end of the year is too optimistic and that the company will be in the doldrums for a while.

This glum mood was only exacerbated by the news that Google had reset stock options for its employees to $308.57, the value of its stock when the market closed on Friday. Like other tech companies, Google claims it had to do this to retain smart engineers who would otherwise jump ship, but investors who bought stocks when Google was flying at $700 a share complain that the move sets up a double standard.

Finally, Google was embarrassed to admit that its engineers accidentally disabled security functions for a small percentage of people using Google Docs, allowing other people to read their files. Although this happened to only .05 percent of Google Docs users, the glitch could have been disastrous for companies and governments that use Google's cloud-based applications. And this isn't the first time Google's cloud computing model has broken down; last month, Gmail crashed for several hours during the start of business in Europe, throwing people into a panic around the globe.

Flattening ad sales, tweaking stock options, technical glitches—is it any wonder that investors are feeling a little jumpy right now? Google is still one of the more reliably profitable companies in the world; remember, revenue is still growing, and the news that has Wall Street analysts so glum is that the pace of growth is slowing down. Nonetheless, Google is finally showing signs of strain in the new economy.

* This post originally claimed that Google's stock had not dipped below $300 a share since 2005. In fact, Google's stock fell below $300 as recently as January. I regret the error.