How high will Google go?
mercurynews.com
MANY INVESTORS REGRET GETTING OUT SO SOON
By Michael Bazeley
Mercury News
Posted on Sat, Jan. 14, 2006
Matthew Sheridan was feeling savvy when he sold his Google stock in late February last year for about $200 -- more than double the company's IPO price just six months earlier.
Like many investors, though, the freelance Santa Cruz programmer now is wondering why he bailed out so soon. The technology giant's shares seemingly have no ceiling -- they've more than doubled again since Sheridan sold his, ending Friday at $466.25.
``I'm feeling a little stupid now,'' Sheridan said of his early exit from the stock. ``Who knows? Maybe there's time to get back in.''
There might be. Google's shares have been on a tear since the company's August 2004 initial public stock offering. The stock glided past three milestones last year -- $200 in April, $300 and September and $400 in November. And stock experts are saying it could climb much higher.
How high?
One Wall Street analyst predicted that Google's shares would hit $600 by the end of the year. Another predicted that Google's shares will hit a whopping $2,000, eventually. That would value Google at more than half a trillion dollars.
``It's a growth company, it's a profitable company, the kids who founded it have done extremely well,'' said Neil Hennessy, president of Hennessy Funds in Novato. ``But it's starting to get very lofty.''
One reason that Google's stock looks especially rich is that the company has never split its shares. During the technology boom of the late 1990s, companies with surging stock prices frequently split the price of their shares, effectively giving investors more shares of stock for the same amount of money.
Yahoo has done five stock splits since it was founded. Without them, its shares would be trading at about $980. Amazon.com, which has done three stock splits, would be trading at $532 today without them.
Google refuses to discuss its stock's performance, but it has hinted it has no plans to split its shares. What's more, Google's founders have stated their fondness for the business ideals of famed investor Warren Buffett. His company, Berkshire Hathaway, has never split its stock, the priciest in the United States at $89,600 per share.
Driving the pricey stock predictions is Google's dominance of Internet searching and its growing influence on online advertising. Google took in $1.58 billion in revenue last quarter -- nearly double its revenues over the previous year. And analysts are predicting that type of growth to continue.
Analyst Safa Rashtchy, who set his $600 price target the first week of January, is betting that the Internet search market will grow more than 41 percent this year, and that Google's share of that market -- now at 40 percent -- will expand. He also expects Google to become more innovative with its advertising and for its other company projects, such as its new online database called Google Base, to start generating meaningful revenue.
``We believe Google is singularly positioned to benefit from the most promising areas of Internet, search and advertising,'' Rashtchy wrote in his note to clients.
Analyst Marianne Wolk of Susquehanna Financial Group said that interviews her firm conducted with search engine and advertising industry companies convince her that Google's made important changes to its advertising services -- moves that will drive more money to Google.
``The real question is, what is the earning power of Google,'' said Wolk, who has a `buy'' rating on Google's stock. ``A lot of people feel that the current estimates for them are too low. Most people anticipate that Google will surpass expectations.''
As bubbly as Google's stock market value appears, it's actually nowhere near as extreme as some Internet Bubble-era valuations.
Juniper Networks' stock closed at $243 on Oct. 16, 2000. That's far less than Google. But the company's price-to-earnings ratio -- which measures what investors are willing to pay for a company's earnings -- was an exorbitant 823. Yahoo shares boasted a P/E ratio of 863 in January of 2000, while Cisco Systems' was 188 at its peak.
Google's P/E ratio, by contrast, was a paltry 97.5 on Friday. For reference, the average P/E ratio for all Nasdaq companies was 37.1.
Bill Noonan pays less attention to a company's earnings potential than many Wall Street analysts. His firm, Contravisory Research, does statistical analysis on stock trends. Noonan says Google appears to be in the middle of an 18- to 24-month growth curve.
``The uptrend is very strong,'' Noonan said. ``It seems like they have more room to grow.''
Could Google hit $700 or $800 next year?
``I could definitely see that,'' Noonan said.
Not surprisingly, these lofty predictions about Google's stock price often become self-fulfilling prophecies. Investors read about an analyst's strong confidence in a company and pour money into the stock, hoping to catch whatever upside remains. Google's shares marched steadily upward in the days after Rashtchy and others released their lofty price targets.
Professor Werner De Bondt of DePaul University's Graduate School of Business is an expert on investor psychology. He says most investors do not understand how to evaluate a company's financial condition, so they seek out ``anchors'' to help them judge a stock's worth.
Analyst price targets serve as anchors for many investors. And as they rise, so does investor confidence.
One study asked retirees to forecast their investment portfolios. Instead of evaluating a company's growth prospects, the retirees tended to base their forecast on a stock's current price and recent track-record.
``Throughout the 1990s, I thought that the market was kind of high,'' De Bondt said. ``But you get used to it.''
But there are Google skeptics emerging from the shadows.
Henry Blodget, the bubble-era analyst famous for touting Internet stocks, recently offered one of the few notes of caution about Google's fortunes. Blodget, who once predicted that Amazon.com's shares would hit $400 (they did), laid out a scenario where Google's advertising revenue -- its chief revenue stream -- plummets through a combination ``market saturation and price pressure'' and other issues.
Blodget said Google's shares could plummet to $100, if the right -- or wrong -- pieces fell into place.
``Is such a scenario likely?'' Blodget wrote on his blog. ``Probably not. But it's certainly within the realm of possibility. (How do we know this? Because the same thing just happened to Yahoo, AOL, and every other advertising-driven dotcom on the planet -- except that in those cases, the fallout was worse).''
Hennessy is even more bearish. He evaluates a company's stock price against its sales numbers. He looks at Google and sees a company far too overvalued by the market. In fact, he said, even if Google were to double its sales next year, he would find it hard to justify buying the stock.
``Is it worth that much money? I would say no. I'm not sure that emotion isn't getting the best of people,'' he said. |
