Google Value Questions Burn Bright

Internet media bellwether Yahoo! (YHOO Quote) is the most obvious point of reference for Google, especially since Yahoo! participates in Google's key business of pay-per-click advertising. Yet for several reasons -- for instance, the lesser role that search engine advertising plays in Yahoo!'s business -- Google bidders have no easy task ahead of them.

One attempt at the valuation issue comes from Squali, who says that the $121.50 midpoint of Monday's per-share price range is 33 times his estimate of Google's 2004 per-share earnings before interest, taxes, depreciation and amortization.

Yahoo!, for purposes of comparison, trades at 24 times such an EBITDA multiple, after one subtracts out the value of Yahoo!'s stake in Yahoo! Japan.

Ask Jeeves (ASKJ Quote), a smaller paid search company, trades at around 21 times 2004 EBITDA, says Squali.

Squali says the apparent premium of Google to other Internet marketing companies could serve as a catalyst that would fuel the recovery in that group.

On the other hand, others might look at the pricing as a sign that Google is appreciably more expensive than a group of stocks that are not usually classified as value stocks.

Looking out to 2005, however, analyst Marianne Wolk of Susquehanna Financial Group sees the $121.50 midpoint price implying a discount to Yahoo! and fellow Internet giant eBay (EBAY Quote).

Based on her estimates for 2005 earnings -- ignoring noncash charges, assuming full taxation and, like Squali, accounting for Yahoo!'s Yahoo! Japan stake -- Wolk says the Google midpoint amounts to nearly 40 times 2005 earnings, compared to Yahoo!'s 42 times multiple and eBay's 46 times multiple.

Comparing net revenue growth, Google is growing at an average 70% per year from 2003 to 2005, says Wolk, while Yahoo! and eBay are in the 40% to 50% range. And Google's EBITDA margin -- 63% in the latest quarter, falling to an estimated 56% in 2005 -- is well above those of Yahoo! and eBay, she says.