Last week came news that Google (GOOG) increased its market share lead in search over Yahoo! (YHOO), Microsoft’s (MSFT) MSN, IAC’s (IAC) Ask.com and AOL - which, like this site, is owned by Time Warner (TWX).
And of course, Google, unlike Yahoo, doesn’t have to worry about pesky distractions, such as, say, an overhaul of the management team. Instead, Google can simply focus on staying on top in search and bolstering its presence in the so-called display advertising or rich media market, selling things like banners, videos and other non-text based ads.
A desire to become a bigger player in graphical ads was a prime motivation behind Google’s purchase of YouTube last year and agreement to buy ad serving network DoubleClick in April.
So where does Google go from here? Several analysts see another 20 percent upside in the near-term. William Morrison, an analyst with JMP Securities, raised his price target on Google’s stock Monday from $580 to $625.
Morrison wrote in a report Monday that he thinks Wall Street is actually underestimating Google’s growth potential. He currently expects Google to generate revenues, excluding ad sales it shares with affiliates, of $11.8 billion this year, compared to an average forecast of $11.4 billion. What’s more, he is predicting that Google’s sales will hit $16.1 billion in 2008 while the consensus of his fellow Street analysts is just $15.4 billion.
“The general thinking here is that Google’s already large size will likely pose a significant impediment to future growth. A converse perspective, which we hold, is that Google possesses significant competitive advantages that are directly attributable to its size, in particular its computing infrastructure, and that these advantages are likely to drive a higher growth rate for a longer period of time than most investors currently anticipate,” Morrison wrote.
And he’s not alone in this view. On Friday, two analysts at Wall Street firm Bernstein launched coverage on Google, as well as other big Net stocks Yahoo, IAC, eBay (EBAY) and Amazon (AMZN), with a $635 price target. The Bernstein analysts also said current Wall Street estimates on Google, for both sales and earnings, are too low.
It’s a dangerous game to expect Google to keep blowing away Wall Street’s estimates. But remember, this is a company that does not give guidance. And so far, analysts have proven to be fairly conservative in their assessment of Google’s growth potential.
For the past four quarters, Google has surpassed consensus earnings estimates by an average of 10 percent. Google has only missed forecasts once in eleven reported quarters as a public company.
With that in mind, as scary as it may seem to predict ever higher prices for Google, the stock still looks like a reasonable bargain. Shares trade at 27 times 2008 earnings estimates, not too frothy for a company that is expected to post a profit increase of 27 percent next year and 30 percent a year, on average, for the next few years.
In fact, Google trades at the lowest price-to-earnings growth (PEG) ratio, which is often used to measure rapidly growing companies, among the big five Internet stocks. Google’s PEG is 0.9. Only eBay is as reasonably valued on this basis, trading at a PEG of 1 on the nose. IAC has a PEG of 1.5 while the troubled Yahoo trades at a PEG of 1.7 And Amazon trades at 2.2 times its projected growth rate.
So say what you want about how new price targets for Google are reminiscent of the late 1990s bubble. But Google hasn’t shown any signs of stumbling. And until it does, the stock is going to keep heading up. Heck, it might not be long before more analysts start slapping a $700, or even higher target, on Google.
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