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Google going higher?
Posted By: Global Investing 411
Date: 4/22/08 at 9:11 a.m. EST
1) Google earnings will not continue to grow at the same pace.
Assuming they slow to a trickle and you assign a PE of 20 or 25 to
next year’s earnings, you are looking at a $550 stock. However, if you
assume that Google maintains even modest growth and assign a PE of 25
to earnings of $30/share for 2009, you have a $750 stock. Of course,
Google has the potential to continue growing rapidly, but this is a
prudent analysis.2) Google has many channels that are exploding in popularity: Mobile,
YouTube, Picasa, Gmail, Apps, Maps, and many more. Few of these have
seen any more than the beginnings of their monetization. When Google
has added AdSense or other ad formats to their products in the past,
they have done so tactfully and it has resulted in massive revenue
growth with no ill effect on the product. As they flip the
monetization lever on their incredibly popular products, you will see
revenues move up in lockstep. This doesn’t even account for the many
new channels that are in the pipeline and will show similar potential
in years to come (TV, print, radio advertising, various tech angles,
etc.)3) Google is now more of an international company than a domestic one
(51% of revenues outside the US last quarter). This means they are not
subject to risk posed by any one region – they are almost as diverse
as you can get geographically.4) Google showed that they are not nearly as economically sensitive as
assumed. Despite the incredible slowdown in the economy, Google
earnings showed little impact. In fact, it is likely that companies
spending frugally might shift more, not less, of their budgets to
Google because of its efficiency.5) Google allayed fears that click growth was slowing for their core
business. They not only blew away expectations, but they demonstrated
that they have improved the quality of clicks, which in turn is
increasing – not decreasing – the amount advertisers spend with them.6) The Yahoo/Microsoft debacle is helping Google – not hurting them.
When Google outsources to Yahoo, it will likely kill the deal anyway,
but for as long as it continues to be pursued, it will enable Google
to enlarge their already huge domination on the ad market. More
importantly, their technology is so much more effective than Yahoo and
Microsoft’s that even IF the aforementioned two combined, they would
never be able to catch Google. Two inferior products don’t add up to a
better one.7) Google is showing themselves to be a master and picking and
choosing the correct strategic acquisitions. Brilliant moves like the
acquisition of YouTube are allowing them to efficeintly integrate
their products together to add value. Partnerships like the one they
have with Salesforce.com are also incredibly successful.8) Google’s stock was down over 30% from its high just months ago, and
this earnings report essentially allayed all fears (and then some) and
put them back to the level of expectations they were seeing near their
high of $747. It would be logical for the stock to return at least to
this level in the near-term, then move higher as confidence builds.9) Google is known the be testing a partnership with Yahoo and the WSJ
reports that it is going exceedingly well. Anyone in the business
knows that it is a natural monopoly and that Yahoo not only needs to,
but would benefit incredibly by outsourcing search monetization to
Google. This would translate to roughly a 3% instant gain in Google’s
revenues, and likely a $100 gain in share price (reflective of the
increased earnings), instantly and with little risk. Google played coy
in discussing the partnership during their call, but it is quite clear
(and being whispered about) that a deal is imminent.
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