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Google Shares: Do I Hear $360?

Kevin Kelleher

The Google bids just keep on rising.

Not, that is, the bids that advertisers make to place ads on Google's site or in its extensive network of sites. But the bids that research analysts covering Google keep making in the form of price targets, which have been spurring speculative traders starving for any information on the closely watched stock.

The latest bid came from Smith Barney, which initiated coverage late Tuesday on Google at $360, nearly 30% above the stock's closing price on Wednesday. Google fell 4.6% to $279.56 in Wednesday's trading session, partly amid concerns that data on keyword prices declined in May from April. In after-hours trading it was up 0.5% to $280.88.

Fathom Online said Tuesday that average prices paid for keywords it tracks fell 15% to $1.66, thanks largely to a 30% drop in mortgage-related keywords. But Fathom's release also stressed that the data are intended for advertisers, and shouldn't be extrapolated into financial assumptions about search companies.

It's well known that advertisers are spending more money on search, but most of that new spending is going on a growing population of ever-creative keywords and not the traditional keywords that are easiest for Fathom and others to track.

Smith Barney, which has provided investment banking services for Google in the past year, ended coverage of Google back in March, but is re-initiating it just in time to place the highest bid in the latest round of pin the price on the stock.

"We acknowledge that the price target is intrinsically very high -- as is the implied $100Bish market cap," wrote Smith Barney analyst Mark Mahaney. "But this valuation is derived from our published estimates and from what we believe are reasonable multiples given our estimated bottom-line growth projections for Google. We apply a 31X multiple to our 2006 EBITDA estimate of $3.3 billion ($10.80 per share) to reach a $351 target price, adjusting for $3.5 billion ($11.76 per share) in cash."

Mahaney said his estimates are conservative, given that they assume that Google's share of the U.S. search market will drop from 61% this year to 52% in 2007, that the company won't have material revenue outside of search in those years, and that its EBITDA margins will decline as spending rises faster than revenue.

The Smith Barney target tops the $350 target offered by CSFB on June 1, and the Tuesday report from RBC Securities calling for $9.40 a share in earnings for Google in 2007, nearly double what the company is projected to earn this year. Those followed a $330 price target from ThinkEquity, which followed a $300 price target from Piper Jaffray, which followed -- well, you get the idea.

The rising price targets on Google have led some to draw comparisons to the late 90s, when analysts like Henry Blodget slapped spuriously high targets on stocks like Amazon.com that in hindsight look foolish. But this time they're coming from seasoned analysts like Safa Ratchshy of Piper Jaffray and Mahaney, who until recently worked at American Technology Research.

The tone of the Smith Barney report was at times self-conscious about the high target. "We're fully cognizant of an $84 billion market cap and a stock that is up 50% year to date," Mahaney said. "We'd be opportunistic around likely upcoming negative catalysts like the Microsoft Analyst Day. And we're focused on long-term risks such as: 1) Competition from Microsoft, Yahoo!, and others and 2) A limited execution record. But our long-term 29%-plus EPS growth forecast makes us buyers even at these levels."

Google, of course, is only adding fuel to the speculation by refusing to give all but the most rudimentary information out about its financial health. This isn't to say the stock is overvalued at any of the proposed targets, just that it's impossible to make more than an educated guess at what the company's true value is.

Google CEO Eric Schmidt said recently that Google's decision, supposedly made after much hand-wringing inside the firm, was made to keep from misleading people.