Google shares set record, spark debate

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SAN FRANCISCO -- The shares of Web search leader Google Inc. rebounded from a sharp fall earlier this year to set a fresh lifetime high Monday, following Wall Street rating upgrades last week.

Standard & Poors equity analyst Scott Kessler said the often volatile Internet stock was enjoying continued momentum after posting strong third-quarter earnings last week.

Google shares jumped 5% to hit $482.70 on Nasdaq, surpassing an intraday trading high of $475.11 set Jan. 11, 2006. The stock fell to lows around $330 in March. Google's market capitalization is now worth nearly $147 billion.

The $60 stock price surge in the past three trading days reopens a debate among investors over how to value a company that is enjoying rapid growth in its own right, allowing it to pull away from many of its closest competitors.

Discussion centers on whether intrinsic growth rates can sustain current valuations, or whether other factors, such as Google's relative performance to competitors, should be factored into a calculation of the stock's worth, analysts say.

"Really the only major Internet stock now that a lot of people want to own is Google," Kessler said, comparing the Web search company to rivals such as Yahoo Inc., eBay Inc. and IAC/InterActivecorp.

In its third-quarter report Thursday, the company reported its quarterly profit nearly doubled and revenue rose 70% it posted further gains in market share in its core Web search advertising business.

On a stock-price-to-earnings basis, a current valuation around 40 times 2007 estimated earnings is consistent with where Google traded before its standout results last week, says Martin Pyykkonen, an analyst with Global Crown Capital.

Following Google's third-quarter report, Pyykkonen and many other Wall Street analysts boosted both their earnings estimates for 2007 and their target-prices on the stock.

On Friday, Wall Street analysts raced to outdo one another in raising stock price targets on Google, with the most aggressive saying $600 per share does not look extreme for the Internet market leader.

The higher earnings estimates justify a target price of $550, up from his prior trading goal of $500, Pyykkonen said.

"It's basically the same multiple to anticipated earnings," he said.

Kessler takes a conservative view, having only raised his 12-month target price on the stock to $500 last week from $435 previously. The S&P analyst was among only a handful of Wall Street analysts to advise investors to sell the stock early this year. He switched to a "buy" rating in August.

He is loathe to return to classic dot-com investment logic in which the relative strength of one Internet player is used to justify higher valuations of the wider Internet group.

Google's financial fundamentals justify a $525, 12-month price target. But the relative performance and volatility of Google's peers in the Internet stock sector justifies only a $465 target, he says. His blended 12-month target is $500.

Beyond forecasting earnings and revenue growth, there are a number of more intangible factors driving Google's stock.

Google is heading into the strongest sales season of the year. At the same time fears of slowing economic growth and the threat to online advertising activity appears, for now, to have had little impact on Google's growth, many analysts believe.

Furthermore, Google has been gaining share against rival Yahoo, which will not begin seeing revenue from an improved Web search system until the second quarter of 2007.

"Some of Google's gains are coming at Yahoo's expense," said Pyykkonen. "Investors are saying why not hold Google for another six months until we know more about Yahoo's response?

"You could certainly have a potentially good run between here and something over the $500 level."

Yahoo shares gained 9 cents to $23.30, up one-half of a percentage point in Nasdaq trading Monday afternoon.
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