I love this guy - Cramer says GOOG worth $630 maybe as much as $810!
Google Eyes
On the day before the anniversary of Google's (GOOG:Nasdaq - news - research - Cramer's Take) IPO and on the day the Internet search giant announced a $4 billion secondary offering, Cramer performed a first on his show: an exorcism.
Cramer said everyone has a "curmudgeon value investor demon" inside him that must be exorcised occasionally in order not to miss investment opportunities. The curmudgeon value investor says you should never buy a stock with a P/E ratio of more than 20.
"You can't let value investors keep you from owning Google," Cramer said.
The mutual fund manager's short-hand rule is to pay twice the growth rate for a growth stock. Google has been growing at a rate of some 35%. Paying twice Google's growth rate would yield a P/E multiple of 70. Cramer believes conservatively that Google is capable of earning $9 a share in 2007, which would equate to a stock price of $630.
While that may sound ridiculous, Cramer said, consider Yahoo! (YHOO:Nasdaq - news - research - Cramer's Take), which trades at roughly the same P/E multiple but has a smaller growth rate. Whole Foods (WFMI:Nasdaq - news - research - Cramer's Take) also trades at a P/E in the ballpark of Google's, with only two-thirds the growth rate.
What's more, in a slowing economic environment, Cramer believes a stock like Google, which doesn't have much economic sensitivity, is worth a super premium, perhaps three times its growth rate. That would equate to a stock price of $810.
The bottom line, Cramer says, is even if Google's growth rate slows to 25% next year and you pay a multiple of twice its growth rate -- and even if Google earns only $7 a share -- 50 times $7 equals a stock price of $350. And that is Cramer's target.
"When I use that kind of analysis, I realize that wherever they price this big block slug of stock, you, my friends, are going to make money." And, Cramer said, if it does sink below the offering price, "then you do the 'mon back," which is to say, back up the truck and buy. |
