June 8, 2005 12:36 PM PDT

Wall Street still loves its rebel Google

To skeptics, it's as though search giant Google's investors are living in an alternative reality where the tech boom never ended.

With a $77.7 billion market capitalization, Google's worth on Wall Street is just about equal with media giant Time Warner; it dwarfs Viacom's $54.6 billion market cap and tops Disney's by nearly 45 percent. Google's share price closed down 4.6 percentage points to $279.56 on Wednesday, just a day after it flirted with the $300 barrier.

All this for a company that didn't even exist seven years ago, routinely avoids providing earnings forecasts, won't conduct a stock split to make its share price more palatable and has a price-to-earnings ratio of 112.27, about twice that of its closest competitor, Yahoo.


What's new:
Despite the big numbers, many financial analysts still believe in Google's potential, particularly when future earnings are considered.

Bottom line:
The search king is benefiting from a hot market, but it will have to deliver nothing short of perfection to maintain its eye-popping share price.

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So are Google investors engaging in some old-fashioned dot-com frothiness?

Surprisingly, many financial analysts don't think so, even as they scratch their heads about how exactly Google will keep this momentum up. "Google's massively profitable with unbelievable growth--if they can continue with this margin structure and growth, they can be a lot bigger," said Rob Sanderson, an analyst for media and communications at American Technology Research.

In April, Google reported first-quarter revenue that doubled from the same period a year ago and net income nearly six times higher, blowing away Wall Street expectations. Its net income was $369.2 million, or $1.29 a share, on revenue of $1.26 billion. "The movement of the stock has been quite spectacular, but the movement of earnings has gone with it," Sanderson said.

For the year, Google is expected to earn $5.17 per share on revenue of $3.6 billion, according to a survey of Wall Street analysts by Thomson Financial.

Despite the big numbers, financial analysts say that Google's multiple on earnings is not egregious, particularly when future earnings are considered. It's now trading at a multiple of 43 times earnings based on a 2006 end-of-year forecast of $6.60 per share, according to Thomson Financial. By comparison, Yahoo's forward price-to-earnings ratio is 50.

Google is also benefiting from a hot market. Worldwide search advertising sales could go as high as $9 billion this year, up from $6 billion in 2004, according to Goldman Sachs. And Forrester Research predicts marketers this year will increase their online budgets an average of 25 percent over 2004 spending levels.

"It's hard to have conviction--to get on the 'raise the price target bandwagon' that seems to be going through Wall Street."
--David Edwards
analyst, American Technology Group

Nonetheless, it's a high-wire act, and analysts say Google will have to deliver nothing short of perfection to maintain its eye-popping share price. When Google went public on Aug. 19, 2004, its price was set at $85 per share. Since then, a few hiccups aside, it has done nothing but go up. In just the last four weeks, Google's share price has gone up 29 percent, from $226 to nearly $300. Some Wall Street analysts now predict the stock could go as high as $325 or $350 a share.

Piper Jaffray recently raised its price target for Google from $275 to $300 based on promising new services such as Google Video and local map services. Still, Piper's lead Google analyst, Safa Ratchty, added that the shares may have a hard time breaking the barrier of $300 for some time.

But never say never. Google likely is benefiting from its considerable brand image. After all, how many companies witness their names become a verb in the common vernacular, are featured on hit TV shows such as "Sex and the City" and can count among their early investors basketball star

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All this for an IPO of $80/share?
Unbelievable. How do they do it? Will Google be the next Berkshire Hathaway?
Posted by Christopher Hall (1205 comments )
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What about the tech bubble in 2000?
Analysts didn't think there was a bubble in 2000. In fact, most of them were surprisingly bullish. If history repeats itself (which it does, strangely!), investors should steer their money clear of Google. This is a bubble, and it is going to fall.

Think of it this way:

Most long-term growth stocks should have a P/E (price to earnings ratio) of below 30. Google's is at 112. Will it be possible for Google to quadruple its earnings in the next year or two? I'd think so--it's surely possible for such a hot product. Then again, that's assuming the stock stays at the same exact share price as it is now. What will be P/E be when the stock tops $400 per share, and then $500?

Analysts are expecting superb growth from a very young company. They are overwhelmingly bullish about Google's performance. It is time to think for yourself whether you think it is worth it to pay $300 for a search engine? For a company that has only $9 dollars in cash at this time per each share? Whatever you're paying for Google, keep in mind that Google is only worth 3.33% of that in cash.
Posted by djn221 (3 comments )
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