When we saw last year how much money Google could make, analysts began to whisper privately that this stock deserved to sell at $250 a share, even as it “languished” in the low hundreds. As a commentator who follows what people are saying privately as well as publicly, I knew that many of the chastised analysts thought that Google could earn $5 this year and deserved a 50 multiple on those earnings, because that’s what the fastest-growing companies deserved. But when I went out on television with a $250 price target last year, when the stock was in the mid-$100s, I was mocked by some of my own media compadres as a reckless wild man. I felt mau-maued to the point that when the company reported even greater earnings this year than I expected, I declined to do the obvious multiplication on those earnings that would yield a much higher price target. If I, a loud-mouthed commentator with no money on the line (I don’t own the stock), was fearful of using a huge price target, imagine how the newly shorn sheep on Wall Street outwardly shunned that simple multiplication.
What irony: When we finally have a stock worthy of outrageous promotion, the shills are too fearful to tell you to own it!
Here’s the new math that’s been hidden from you: With no competition to speak of and plenty of accelerated revenue growth, Google could earn $10 a share in 2007. Because Yahoo has a 58 multiple, it’s reasonable to give Google at least a 50 multiple—heck, it’s growing faster than Yahoo, so maybe I’m still being conservative—on 2007 earnings. That would put it at $500 a share (a 50 multiple times $10 equals $500). Given that money managers are already comfortable paying those prices for Yahoo, it’s reasonable that they’ll pay the same for Google. I also expect Google to be added to the S&P 500 soon, which will speed its price rise, as $4 trillion in index money comes rushing in to buy it.
For me, Google is as much an exercise in the difficulty of finding great stocks in the post-bubble years as it is a money-machine wonder that every media and technology company envies. What Google—the stock, not the company—says is that the pendulum has swung way too far from overpromotion and hype for the likes of worthless junk like eToys and Webvan to downright self-censorship of good solid analysis for fear that heavy-handed regulators will ruin you. As Google winds its way toward $500—with a pit stop at $350 by year’s end—let’s hope that the restraints on bullish research are released before they reach strangulation level and the patient who gets suffocated is you.