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Google at $600? Time to sell
Wall Street analysts are reaching far into the future to justify higher prices for the stock. My crystal ball says to take profits now.
By Robert Walberg
Over the past 12 months, analysts have been raising their price targets on Google almost as frequently as the Federal Reserve has raised interest rates. But while the Fed hinted its hikes are near an end, Wall Streets love affair with Google remains red hot. Just yesterday, Piper Jaffray analyst Safa Rashtchy upped his price target on Google to $600.
The move grabbed attention for the analyst and another 4% gain for investors. A win-win scenario, unless of course you are concerned with Wall Street credibility and the long-term well-being of individual investors -- both of which were put at risk by yesterdays aggressive forecast.
Google (GOOG, news, msgs) may, in fact, continue to grow by leaps and bounds and hit all targets set by Wall Street, not only in fiscal year 2006 but also in fiscal 2007. It should be noted that Rashtchys price target is based on a multiple of 50 times his fiscal 2007 earnings estimate of $11.92 a share. Google hasnt even posted its final 2005 numbers yet, though the Street is expecting a gain of $5.88 a share.
In other words, Piper Jaffray clients are being asked to believe that Google will trade at $600 by year end, based on what the search giant is likely to earn 24 months down the road. That must be one incredibly clear crystal ball. In Rashtchys defense, his estimates are in line with the consensus view on Wall Street.
Smooth sailing, until it's not
Nevertheless, do you really want to invest your hard-earned money on what a few analysts on Wall Street think will happen not just three months from now, but 12 and 24 months hence?
Count me out. Ive been around this business longer than I would like to admit, and one of the lessons I've learned is that, for most analysts, a thing in motion stays in motion until a surprise event or two alters the landscape. When that happens, they trip over each other to adjust up or down their original forecasts based on the new dynamics. Google is certainly in motion, and there is no reason to think that business will slow significantly any time soon.
More from MSN Money
However, it is also important to recognize that Google has not reinvented the wheel. Yes, it dominates the search engine business - a fast grower, no doubt but competition from capable, well-financed competitors such as Yahoo! (YHOO, news, msgs) and Microsoft (MSFT, news, msgs) (the publisher of this Web site) is intensifying. So its not only possible, but also likely, that Google wont achieve the same growth rates going forward as it has over the past couple of years.
Online advertising is also considered a source of growth for Google, but investors and a few analysts need to understand that advertising is still advertising and that online sites are simply a newer, fresher approach to targeting consumers. Fortune 500 companies may shift ad dollars online -- and Google may capture a considerable share of those dollars -- but advertising budgets still depend upon the strength of the economy.
Yields on short-term interest rates recently, if briefly, climbed above long-term rates, an event that typically signals that a recession is on the way. If the economy does slow, money spent on advertising will, too. Conventional advertising might slow faster than online advertising, but any slowdown could lead to Google falling short of estimates or reining in its own growth forecasts. Neither scenario is good news for the stock, particularly considering the stocks inflated valuations.
Time to sell
Google is in the early stages of monetizing a number of its assets -- including Gmail and Froogle -- and it may continue to surprise analysts with one brilliant quarter after another. But to base a $600 price target on an 2007 earnings multiple that is higher than the multiple investors were paying for 2006 earnings is to ask investors to suspend reality.
Even assuming that there are no negative surprises from increased competition, a slowing economy or, heaven forbid, a management misstep, Googles profit growth is expected to slow from 115% in 2005 to 46% in 2006 to 39% in 2007. Now, 39% growth is nothing to sneeze at, but it is a long way from todays growth rate. And is it really reasonable to assume that the stock will continue to trade at 50 times future estimates? It entered Tuesdays session trading at 48 times fiscal 2006 estimates of $8.60 per share.
And this is a stock with a market cap of $128 billion, more than that of Yahoo! and eBay (EBAY, news, msgs) combined.
Ive been a fan of Google all along (see prior Street Patrol articles) but valuations and expectations are now too high for my liking. Ill risk being left behind and sell into the current frenzy.
Updates
Ill also close out my Street Patrol portfolio positions on a couple of other big winners last year Sandisk (SNDK, news, msgs) and M-Systems Flash Disk Pioneers (FLSH, news, msgs). Supply concerns coupled with relatively high valuations suggest that its time to bank the profits and move on.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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