Gurgle

Musn’t gloat.
Ther media is turning around Google (GOOG) is a big way. Barron’s featured Google on its front page this weekend.

To get a sense of what might happen to the stock, we gave one über-bull’s 2006 revenue estimate for Google a 20% haircut, trimmed his projected expenses by 5% (but no further, because bulls greatly underestimate Google’s costs), deducted stock-based compensation and, generously, gave the company credit for the considerable interest income on its cash. The result: Earnings would be 30% lower than the bull’s projection, at $6.28 a share. If the stock were to maintain its current multiple of 41 on those lowered earnings, it would be worth $257. It’s more likely the multiple would shrink to as low as 30, in line with the slower growth. That would make the stock worth $188, versus its recent $360.
Though this exercise is less than scientific, it clearly demonstrates two things. First, Google’s business has tremendous leverage — changes in revenue, in either direction, have outsized impacts on the bottom line. That’s the result of high profit margins: 88% of net revenue and 58% of gross revenue. Second, the exercise provides a glimpse of the risk posed by a lofty stock multiple.
“Google reminds me very much of what went on in 1999 and 2000,” says Fred Hickey, editor of the well-regarded High-Tech Strategist newsletter and a member of the Barron’s Roundtable. “The valuation is insane, relative to what they do.”

The stock opened at $344 today. The AP is reporting that analysts are standing behind Google:

“Google remains our No. 1 buy recommendation in the Internet sector, and our price target remains $490,” said Citigroup analyst Mark Mahaney, who added the March 2 analyst day might be another catalyst for the lofty stock.
Sasa Zorovic, an analyst with Oppenheimer, said the recent stock weakness since Google reported disappointing fourth-quarter earnings might even provide a buying opportunity. The stock has fallen 20 percent since reported quarterly numbers on Jan. 31.
“We continue to believe the online advertising industry remains a powerful growth story and that Google enjoys a market-leading position, gaining share from the competition in recent months,” Zorovic said in a report. “We believe the recent pullback provides a buying opportunity, and we reiterate our ‘Buy’ rating and $540 price target.”

Posted by on February 13th, 2006 at 11:31 am


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