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Slower Growth at Google

Should tech investors search elsewhere?

Which investment provided the better return in 2006: shares of Google or an index fund designed to match Standard Poor's 500-stock index? Answer: The typical SP index fund returned nearly 16% in 2006, while shares of Google gained just 12%.

Given the hoopla generated when Google's share price surpassed $500 last year, the stock's middling return seems surprising. Large numbers work against Google. The high share price makes dollar movements seem impressive, although they're not when viewed on a percentage basis. Moreover, the bigger the Mountain View, Cal., company gets, the harder it becomes to post impressive revenue and earnings gains. The estimated 80% earnings gain in 2006 will slow to 33% this year, according to analysts' forecasts. At $504, the shares (symbol GOOG) trade for about 37 times expected 2007 earnings of $13.79 per share. That seems reasonable. But if the earnings growth rate continues to shrink (it's down from 256% in 2004), the price-earnings ratio will shrink, too. The stock's dull performance in 2006 indicates that investors may have better opportunities elsewhere.