Wednesday, January 04, 2006

Google at 650?

Piper Jaffray upgraded Google stock and said in a research note that Google will hit $600=00 by year end. Bear Stearns updated the stock to outperform from peer perform with a price target of $550=00 by year end. There is another analyst who put a price target of $2000=00 which projected Google getting 100 Billion in revenues!

CNBC interviewed all the three analysts this past week. The Piper Jaffray analysist said he raised the target price for Google as he didnt want to raise the target every month. The Bear Stearns analyst had done some more study and observed that Google has filed for more patents in the last nine months than it has done in its entire corporate history. His opinion is that Google's patent portfolio will protect it against a behemoth competitor such as Microsoft from trampling Google. The $2000=00 price target prediction wasnt very convincing - the analyst based his prediction on Google owning/creating content for stocks/bonds and health related issues which is not likely given its current business model.

Are the analysts right or does it look like irrational exuberance? Let us look at what the numbers tell us. I have posted a previous study of this sector - link to that study is noted below.

The growth rate from quarter to quarter and year over year is readily available at

The quarterly growth rate of 10-15% points to an annual revenue of 5.9 billion for FY05. The number of outstanding shares are increasing at the rate of 6% year over year. Let us say Google will continue to grow at 70% in 2006 and 50% in 2007. Currently the analysts are expected revenues of 9 billion for 2006 which is an under estimate. 9 Billion run rate is possible if the growth slows to 50% year over year. Looking at the quarter over quarter run rate, it looks as though the growth is slowing to the 70% range. Googles revenue is more likely to be in the 10 billion range in 2006. It is also likely that revenues will slow down to 50% year over year in 2007. The 2007 revenues are only an estimate now looking at how Yahoo!'s growth rate slowed down. This run rate will give EPS of 14 dollars a share by 2007. If share dilution is included in the EPS amount, it will be $12.5/share. If we assume the P/E multiple of 50 in January 2008, it will give us a per share value of 625.

Now this is assuming Microsoft and Yahoo! wont capture larger chunks of the market and that Google will continue to have the pricing power it has now with online ads. Expect the competition to get much fiercer in the second half of 2006 and in the first half of 2007.

While it is possible for the stock to reach $550 or even $600 this year, the future upside is going to be limited given the increasing market cap and decreasing market growth. If the stock hits $600, I would sell and take some profits. Since the analysts are underestimating the Google revenue for 2006, it is likely that Google has potential for upside. Yahoo! and Microsoft have improved their search engines and will continue to improve it moving forward. Unlike Microsoft, which virtually owns the Office and Windows market, Googles market will be fragmented and it will never be able to gain power like Microsoft does.

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