Take Google's Gift
08/19/05 - 07:28 AM EDT
Jim Cramer
Editor's Note: This is a bonus story from Jim Camer, whose commentary usually appears only on RealMoney, where it originally was published at 10:25 a.m. EDT Thursday. We're offering it today to TheStreet.com readers. To read Cramer's commentary regularly, please click here for information about a free trial to RealMoney.
Whether it's $4 billion in Google(GOOG Quote - Cramer on GOOG - Stock Picks) stock that's for sale in this offering or $40 billion, in the end, it will be absorbed and absorbed at a less-than-huge discount. Because Google's got earnings, and someone's going to pay for those earnings. Sure, we can fret that this is new spending money. What are they going to do with it? Buy Time Warner(TWX Quote - Cramer on TWX - Stock Picks)? Just kidding. Still, the issue is that there's a potential for $10 in earnings power in 2007 for this company, given the astounding lack of competition and the potential for it to monetize paid search. Something has to be paid for that $10. It's simply a "solve for M" situation, M being the multiple you want to pay for it. There are a couple of ways to solve for M. There's the value, pristine way, which will produce nothing that can work. And there's the practical, relative way, in which you look at where other stuff that is like Google is trading, and you create the mosaic of M, which I will share with you now because it is what I used to do at my hedge fund.
First, I recognize that solving for M is distinctly soft algebra. How much certainty is there to the $10 EPS number? Frankly, it is possible; it isn't even a stretch if everything goes to plan, which, of course, means above plan.
But I like to say immediately that such a possibility leaves no room for doubt. So let's give it a haircut. Let's take 10% off that number. Say it will only earn $9. Give us some margin for error.
Now, what's the growth rate? Google's been growing about 35%. I expect that the growth rate can accelerate as it begins to monetize even more than just paid search. Again, though, let's say it doesn't. Leave it at 35%. I have been willing to pay as much as twice the growth rate in price-to-earnings ratio, but no higher. That yields a 70 P/E maximum. Right now, I could plug that in and come up with 70 times $9, which equals $630. Wow, and whoa! Too ridiculous. Right?
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