Google Ready to Rock Higher

By Phil Erlanger  JAN 12, 2007 3:38 PM

Once the stock clears $500 it is off to the races.


I believe that Google (GOOG) is now ready to rock higher. Last January, the stock was at $475 and tonight it closed just under $500. The stock has gone nowhere for a year. My firm owes the credit for this stock coming into our portfolio to one of our favorite and most insightful institutional clients in Avon, CT. He got us thinking about Google during a discussion about the likelihood it would acquire Sun Microsystems (SUNW).

How can my firm recommend this stock? Easy!

First, earnings estimates for the year just ended are $10.30 and 90 days ago were $9.97. 90 days ago the December '07 numbers were $13.07 and now are $13.79. Google does not guide the Street and analysts are left guessing and are constantly on the low side with their estimates. Next year's number could easily be $15. The December 2006 P/E will be around 48.5. Therefore, if it can come in at $15 and the P/E were to remain the same, our future price would be 15 X 48.5 = $727.50. I threw these numbers by my Dad last night and he pushed me to ask 'what is the risk?' A very good question. This is what Tuck MBAs and former marines do. They never quit asking questions or pushing you to do that last mile. Thanks for the insight as the readers will like this extra step.

If the $15 were to be reached in 2007 and the P/E were to fall to 30 then the price would go to $450. A second scenario would be for the earnings to drop to $10 and the P/E to drop to 25 then the price would go to $250. However, if the P/E were to drop to 40 and Google could still hit $15 in earnings then the price would go to $600. There is your risk analysis and a good exercise that anyone with a major position should undertake a few times a year to determine if the stock is ahead of itself.

My firm notes $800 invested in Cisco (CSCO) when it came public was worth $800,000 at the peak ten years later in 2000. Google came public in August of 2004, a little less than 2 1/2 years ago. A growth stock can grow for 10 years if the business model is great. Cisco split its stock 10 times between 1990 and 2000. Google has yet to do one stock split. $800 invested in Google is now worth around $3,600. My firm notes the company has no long term debt with over $10.4 billion of cash and short term investments. Sales will exceed $9 billion from $6 billion.

Once the stock clears $500 it is off to the races. We will be long this stock for a ride it has not seen the likes of in two years. I note the Erlanger Short Intensity is 77%. My firm's friends at Bluehawk have a current target of $530.23 with a 39 week target of $691.49 and a 3 1/2 year target of $983.92. This valuation is based on cash not on some contrived EBITDA number. Clearly, the growth must be maintained but if Google can achieve such growth then this stock could rival perhaps the greatest growth stock of all time Cisco or Wal-Mart (WMT).

No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.