Saw this recommendation on google. With google crossing 450$, I think analyst are tripping over each other in raising their price targets.
Gives me a feeling of deja-vu – remember year 2000, right after the internet bubble burst – when the conventional thought was that companies like e-bay, CISCO could not go down, because these companies had solid business models, were dominant in their industries and had a fantastic future ahead of them.
The recommendation also notes the following
Stahlman said he reached his estimate for $2,000 a share using a multiple of enterprise value, which adds market capitalization, preferred equity and debt and subtracts cash.
That's based on the 6.2 multiple commanded by Redmond, Wash.-based Microsoft Corp., the world's largest software maker and the company most often equated with Google as a competitor and model, he said.
Wow !! how can google be equated with microsoft ?? Don’t get me wrong …google is a great company and I love google product (I cant think of a day when I have not used the search engine). But google is not a monopoly by any stretch of imagination (which microsoft was for quite some time for OS and office products). Going forward the competition is only going to increase and I cannot think of goggle controlling the internet the way microsoft had a lock on the desktop.
The analyst predicts a sale of 100 billion some time in the future (does'nt say when) and the price of 2000 gives google a Mcap of 0.5 trillon dollars (500 billion !!!). Assuming google is doing extremely well even then, and has a Net profit margin of 20 % (current is 25 %), which I think is not very likely (but still lets assume for the sake of it). The PE at that time would still be around 25.
How many 100 billion dollar companies can grow at above average rates ?
How many 100 billion dollar companies have a net profit margin of 20 % or higher in a global market and can sustain it ?
How many 100 billion dollar companies have growths high enough to justify a PE of 25 ?
"Two things are infinite: the universe and human stupidity; and I'm not sure about the the universe." - Albert Einstein
update : 01/20/2006
read views on google from bill miller. According to him the value of google could twice of the current price. At the same time following comments from him are worth noting
He said Google's (Research) market-implied growth rate is about 28 percent. Consensus numbers for the company point to a 5-year growth rate of 33 percent to 35 percent, which then slows over the next 12 years to that of the overall economy, he said.
"The theoretical value of Google is still substantially higher than the market price. So the theoretically justified market cap under those assumptions is in the $240 billion range," Miller said earlier this week.
Miller, who takes a long view on stocks and has low portfolio turnover, said there are still many unknowns about Google. Many companies start with great promise and then something goes awry and they disappear, he said.
Another topic at the bull session was whether Google's users were "locked in" to its model, the way customers of Microsoft's Windows operating system are, said John Miller, an economist at Carnegie Mellon University.
"Suppose you do have the best search engine. The big question is how sticky are the users," he said.
In theory, customers could easily use a search engine other than Google, but Bill Miller said the fact that Google's market share is stable suggests that a "psychological lock-in" driven by brand loyalty is keeping them coming back. (emphasis mine)