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Google at $300? It's heading there
The company delivered stellar first-quarter results, and it's likely to continue to post impressive numbers. Analysts already are boosting their estimates.
By Robert Walberg
In a word, "Wow!"
Google's first-quarter earnings report was nothing short of sensational. Gross revenues surged to $1.26 billion, almost double the year-ago figure of $651.6 million. Almost more impressive was the fact that gross sales were up 22% from the previous quarter. Growth like that on a year-over-year basis would be great for most companies, but to do it sequentially is astounding.
The list of impressive numbers continues. Operating income rose 46% sequentially and 185% year-over-year; operating profit margins jumped to 35.2% from 23.8% in the year-ago period; free cash flow for the first quarter totaled $387 million, an improvement over last year's total by an amazing 217%; and net income went from $64 million last year to $369.2 million.
Google's (GOOG, news, msgs) net income was bolstered by an unusually low tax rate of 19% during the first quarter. But even when you adjust the numbers for a more typical rate of 30%, the net income of $1.12 per share blew away the Street's consensus forecast of 92 cents.
Google's net revenues, after the commissions it paid to other sites in its advertising network, totaled $795 million.
Unfounded concern
Apparently, investor concern that search ad revenues were slowing was unfounded. First, Yahoo! (YHOO, news, msgs) and now Google have shown that the market for search ad revenues remains in the early stages of what can only be described as phenomenal growth.
What's even more startling is that Google is just beginning to monetize its brand and its search revenues. Its deal with AOL Europe helped the company's international sales surge beyond its own optimistic targets, with international sales reaching 39% of total first-quarter sales, up from 35% the previous quarter. With Europe and other regions of the globe behind the United States in using search ads, Google's international business should remain a key driver of growth going forward.
While some analysts see the company's near single reliance on search ad revenues as a negative, I see it as a positive. First and foremost, the first-quarter's numbers prove that Google is in the hot spot of an explosive industry. Second, and more important for the long term, the company still has the potential to use the power of its brand to significantly bolster its Gmail, Froogle and Picasa products.
Who knows, Google might one day decide to launch a browser of its own, thereby lifting its search numbers and providing a wider platform for its secondary businesses. Such a move would be a shot at Microsoft (MSFT, news, msgs), but then again Microsoft is zeroing in on Google when it comes to the search business so these two Internet giants are likely to be mixing it up on several fronts in the quarters and years to come. (Microsoft publishes MSN Money.)
Out in front
Increased competition is another threat to Google and its impressive margins, but at this point investors shouldn't worry too much about Microsoft's heightened efforts in the search area. Google enjoys tremendous brand strength and awareness. I'm not sure about you, but most people I know use Google's search no matter what portal or browser they use.
The Nielsen/NetRatings for March confirm Googles search advantage; the company processed 2.1 billion searches versus 907 million for second place finisher Yahoo. Just as others tried to copy eBay's (EBAY, news, msgs) success in the online classifieds business with little success, Microsoft will have its hands full trying to steal Google's search business. Admittedly, there are far fewer barriers, but Google is in the driver's seat and its management team obviously knows what it's doing.
One thing that the company plans to do more aggressively in the near future is to use graphical ads with its search instead of just text ads. Combined with its expanding international presence, that move should help pull in large corporate advertisers seeking to create and/or reach out to a bigger market.
Bottom line, Google is a well-managed company with a strong brand, growing at eye-opening double and triple-digit rates that's in the early to mid-stages of making money off its assets. Though the stock isn't cheap, especially after surging after its earnings report, aggressive growth investors shouldn't shy away from it given the company's sensational growth rate and management's upbeat tone regarding industry conditions.
It's all relative
After yesterday's numbers, analysts are busy adjusting their assumptions regarding future quarters. So investors are seeing a barrage of ratings and earnings upgrades. Prior to the first-quarter numbers being released, the Street expected Google to earn $3.94 per share this year and $5.12 in 2006. Those numbers will climb substantially in the days ahead.
Even though Google might end up trading somewhere between 40 to 60 times projected 2005 and 2006 earnings, the valuation isn't that expensive when you consider that the company is growing sales and earnings at more than twice that rate.
Stocks like Google aren't for the faint of heart, but based on the company's strong momentum, the stock could easily trade in the $270 to $300 range over the next 12 months. Given how the rest of the market has struggled this year, buying stock in a company delivering explosive growth sounds like a winner to me, especially if that stock still has upside potential of 20% to 35%.
At the time of publication, Robert Walberg neither owned nor controlled shares in any equities mentioned in this column.
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