|Slow and Steady |
Google's relentless rally
The numbers are mind-boggling. Google came public in August 2004 at $85 a share. Its market valuation now tops $100 billion, and its shares trade at a price-to-earnings ratio that's about five times that of the S&P 500.
On the other hand, the company is growing much faster than any other outfit of its ilk. Google's net revenue, excluding so-called traffic-acquisition costs, is expected to grow 93% from a year ago in the fourth quarter to $1.26 billion, according to analysts surveyed by Thomson Financial. By contrast, Yahoo! is projected to see a 36% gain in sales, while revenue at Microsoft is expected to jump 11%. Some investors warn against putting too much faith in those sorts of comparisons, though. It's hard "to accurately forecast immediate and long-term operating performance," says Les Satlow, who helps manage $320 million in assets under management for Cabot Money Management in Salem , Mass., including Google shares. "What you can do is make what you consider reasonable assumptions." By Satlow's reckoning, Google could be a $450-to-$500 stock if it "really fires on all cylinders for the next five to 10 years." Conservative estimates, meaning 25% to 30% operating-income growth, could mean that the shares are fairly valued at current prices, he says. To some investors, such as Paul Meeks of NMH Advisors of Charleston, S.C., Google shares are expensive now. Using what he calls "very aggressive" assumptions over the next five years, he has calculated a price target of $322. He follows the tech sector but doesn't own the shares because he focuses on small-cap stocks. Meeks says his calculation "assumes that Google continues to grow like a weed even when it's much larger, never sees its outlandish profit margin pressured by competition, and is able to earn as much on its future assets as it does now," says Meeks, who doesn't currently own the shares. "Although in the short and probably intermediate term, GOOG is indeed special and deserves a premium, this is ridiculous."