June 28, 2005 -- 1:51 a.m. EDT
Google's Shares Top $300,
But the Bulls Remain
By MYLENE MANGALINDAN
Staff Reporter of THE WALL STREET JOURNAL
Can a $300 stock be a "buy"?
The shares of Internet-search leader Google Inc. topped that level yesterday, less than a year after its initial public offering at $85 a share.
Despite the lofty price, 24 of 30 stock analysts on Wall Street rate the company as a "buy," or "strong buy." Mark Mahaney, of Smith Barney, has posted a price target of $360 a share, recalling some of the outlandish price targets at the height of the Internet-stock bubble in 1999.
At its 4 p.m. price on the Nasdaq Stock Market of $304.10, up $6.85, or 2.3%, Google commands a market capitalization of $84.5 billion, ranking it 23rd among U.S. corporations, just ahead of Home Depot Inc. and just behind PepsiCo Inc.
Google's ascent has defied skeptics, whose lack of interest in Google's unusual "Dutch auction" IPO last August forced the company to lower its offering price to $85. Since then, Google's stock has more than tripled, compared with a 2% gain for the Dow Jones Industrial Average, and 1.2% rise for the tech-heavy Nasdaq Composite Index.
The rich valuation is rooted in the growth of online ads, which accounted for 99% of Google's revenue last year. Analysts expect Google's revenue to increase 82% this year, and its earnings per share to grow by 91%, according to a Thomson First Call survey. Over the next five years, analysts expect Google's revenue to grow 30% annually, on average.
That's a tall order, say some. That would require Google to maintain its lead in the search-advertising market, despite the aggressive competition from rivals Yahoo Inc., Microsoft Corp.'s MSN and others. It also assumes that the company continues its leading position as it expands into other overseas markets. In addition, Google is moving into new markets such as electronic-payment processing where other big incumbents, such as eBay Inc.'s PayPal, service exist.
These new businesses and projected gains in Google's share of the online-ad market "represent potential wild cards to our outlook for revenue," wrote Marianne Wolk, an analyst at Susquehanna Financial Group, on June 14.
But some Wall Street watchers think Google can meet the lofty targets. Safa Rashtchy, of Piper Jaffray, wrote in a May 31 note that the Mountain View, Calif., company has consistently topped Wall Street expectations, and is aggressively expanding into new areas, such as maps, local search and personalized home pages.
"Google should be able to extend its brand successfully and build a long-term advantage," Mr. Rashtchy wrote. At the time, he raised his price target on Google to $300. Yesterday, Aaron Kessler, another Internet analyst at Piper Jaffray, said the firm would re-evaluate its price target now that Google has surpassed it.
But Mr. Kessler pointed out a significant difference between Google and the Internet wunderkind of 1999: strong and growing earnings. "You were buying a concept before. You're buying on fundamentals today. You were buying earnings five years down the road. You're buying earnings this year or the next year."
Mr. Mahaney, in an interview, pointed out another difference: Google has been rising while other Internet companies have been falling. Indeed, shares of Yahoo, eBay and Amazon.com Inc. all are down for the year, while Google is up 58%, Mr. Mahaney said. In 1999, Internet stocks "traded directionally the same," he said. "That's clearly not happening here."
Ken Smith, a portfolio manager for Munder Capital, acknowledges that Google has far exceeded his expectations since going public. "That's where everyone has been wrong," Mr. Smith said. "It's a dangerous stock to be a bear on." Munder owned 308,700 Google shares as of March 31, according to a filing with the Securities and Exchange Commission.
Still, Mr. Smith said that Google's growth will inevitably slow one day, with important consequences for its share price. "We've seen that a little on Amazon and eBay, on those stocks where the business momentum has started to slow and all of the sudden valuation has started to matter. Some day that will happen for Google. I don't know if it's this week, this year or five years from now."