November 17, 2006 4:00 AM PST

Is Google worth its weight in gold?

As Google's share price neared $500 Thursday, analysts were unfazed by the fact that the search king's market capitalization is greater than its three biggest Internet rivals combined and about double that of media companies Walt Disney and Time Warner.

Is Google really worth that much? Yes, said several financial analysts, because it's growing faster than rivals and--at least at the moment--there seems to be no bounds for that growth. In fact, they think the Mountain View, Calif., company could be worth a whole lot more.

"Google still hasn't reached its peak valuation. No one really knows when growth materially slows," said Scott Devitt of Stifel Nicolaus. "I would own Google before other stocks in the (large market cap technology) sector despite its $151.8 billion market cap."

Google's stock ended the day Thursday trading at $495.90 per share, its all-time high closing price. The stock has been rising steadily since the company reported in mid-October that its third-quarter profit nearly doubled from a year earlier.

That puts Google's market cap at around $151.8 billion, compared with Yahoo's $36.2 billion, eBay's $46.4 billion and Amazon.com's $17.6 billion. Among traditional media companies, Disney's market cap is about $69.1 billion and Time Warner's is $81.1 billion. However, Google's market cap is still a far cry from the $289.7 billion Microsoft boasts.

Despite the dizzying comparisons to virtually every media and tech company not named Microsoft, analysts say Google's value makes sense when compared with its peers. Why? Mainly, for all Google's expansion, it's still outpacing the rest of its peers. In the most recent quarter, Google's organic revenue growth (that's growth achieved without buying other companies) was 78 percent, compared with 20 percent at Yahoo and eBay and 24 percent at Amazon, according to Devitt.

"There still are a tremendous amount of growth opportunities left for the company," said Steve Weinstein of Pacific Crest Securities. "Their momentum continues to strengthen, they're branching into new forms of advertising and media and they've made a lot of partnerships. It's the best opportunity in the sector."

Nearly all of Google's revenue comes from online advertising, a market it dominates, and it's expected to garner 25 percent of the U.S. Internet ad revenue this year, compared with 18 percent for Yahoo, according to projections from eMarketer.

"I think it's easy to get scared of Google because of the absolute market cap and share price," Devitt said. But it's the market cap and the growth potential to which people should pay attention.

For 2007, Devitt projects Google's revenue will be twice that of Yahoo's and its net profits will be 3.7 times that of Yahoo's.

"If the current trend continues Google could quite possibly have net profits that exceed Yahoo's revenue by 2009," he said. "And that's something to pay attention to."

No surprise that analysts think Google stock may continue to go up and up. Why stop at $500? Piper Jaffray analyst Safa Rashtchy predicted in January that Google stock could reach even as high as $600 this year. He reiterated that price target after the company posted its third-quarter results last month.

Google's "exceptional growth" is a result of "the network effect of the more than 35 products that Google has introduced over the past two years, and the company's laser focus on optimization and re-optimization of advertisements," analyst Safa Rashtchy wrote in a report dated October 20.

"We maintain our view that Google is an iconic company that, like Microsoft and eBay before it, has defined a new and vital industry," the report said. "We believe that over the past year Google's lead in search and online advertising has become evident and will become even more apparent as it continues to exceed its closest comparables."

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market capitalization, net profit, Google Inc., media company, Yahoo! Inc.

 

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