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Google's got $400 in its sights
Search giant outdoes itself with blowout earnings report. With online advertising only gaining strength, don't expect a stumble anytime soon.
By Robert Walberg
For most consumers, Google Inc. (GOOG, news, msgs) is synonymous with search. For most investors, Google is synonymous with profits -- big ones. It takes a lot to wow Wall Street, especially time and time again, but Google has managed to accomplish that task easily.
This quarter was an exception -- but only because Google exceeded even the most optimistic estimates. Bolstered by strong growth in online advertising sales, the company reported a sevenfold jump in net income on a doubling of revenue. The eye-popping numbers easily exceeded consensus estimates and the stock jumped more than 10% in after-hours trading.
No doubt analysts will be busy upping their sales and earnings estimates for the company over the next few days to reflect the companys impressive operating leverage. With the higher forecasts will come a higher stock price. Even at $335 per share (the latest after-hours price), Google trades at about 55 times the high end of estimated fiscal year 2005 earnings and roughly 42 times what is likely to be the consensus forecast for 2006, after analysts have rejiggered their estimates.
Cheap until proven otherwise
These multiples might seem high, but if you consider that the company is posting triple-digit growth rates they seem downright cheap. And thats likely to be the majority view until there is actual evidence of a slowdown in growth. Barring that, this report has clearly put the bulls back in charge of the stock. And with the kind of momentum Google has generated in the past, the stock could easily approach $420 over the next six-months. A move to that level would represent an additional gain of 25%.
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Certainly, Google faces challenges ahead -- not the least of which is keeping up the expectations its success creates. Another obvious challenge is the heightened competition from the likes of Yahoo! (YHOO, news, msgs) and Microsoft (MSFT, news, msgs) (the publisher of this website). So far, however, neither company has had much success dislodging Google from its search perch and, given how closely Google has become associated with search, I doubt they ever will.
Forget the nitpicking
On the contrary, as Google leverages its brand strength and continues to flex its muscles in areas such as e-mail and e-commerce, it is Google that is likely to end up being the 800-pound gorilla that maintains its lead in search and takes share elsewhere.
More and more of Google's advertisers are Fortune 500 companies --companies that are beginning to shun traditional advertising for the more growth-oriented online option. With consumers increasingly doing everything from banking to shopping online, this source of revenue should continue to be a generous source of profits for Google.
If there were any negatives to be gleaned from this quarters report it might be the companys brisk pace of hiring; more than 800 employees were added in the quarter. As long as growth continues unabated, the company can absorb all the new hires. Building in such a large structural base might come back to haunt the company down the road, however, when growth eventually and inevitably slows.
But thats nitpicking. Right now investors shouldnt waste their time looking for the few faults. For the near-term, the skys the limit for Google. Investors should simply enjoy the ride.
At the time of publication, Robert Walberg did not own shares of companies mentioned in this column.
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