You can blame Eliot Spitzer if you missed out on the last 200 points of Google. You might even be able to blame the New York State attorney general if you miss out on the next 70 points of the great search-engine stock, which I now expect to soar from $280 to $350 by year’s end. You can point the finger at Spitzer, because Wall Street analysts have become so timid, so downright apologetic and fearful of prosecution, that they have failed to get behind arguably the greatest stock of the young 21st century.
In fact, as Google climbed from $85 to $100 to $200 to $280 in the past year, hardly an analyst anywhere beat his chest or banged the table that you had to own Google. At best, we had some sheepish “buys,” lots of phlegmatic “holds,” and, moronically, a couple of outright sells by those who needed to prove that they could be bearish after issuing empty-headed rah-rahs for so long. No one wanted to be affiliated with this rocket ship, at least publicly. The behind-the-scenes consensus analysts formed by talking to the few management people who would talk would have seemed too outrageous and brought on too much scrutiny in what is meant to be a time of penitence or at least low visibility.
What would they have said, if they weren’t so chastened (too chastened, I believe, because Spitzer wasn’t against promotional research; he was against paying the promoters under the table through investment banking)? I think you would have heard a succession of promoters raising their price targets to the point where you would be expecting this stock to blow through not just $300 but $400 and even $500.
Amazingly, even the most aggressive bulls (whatever their motivation) could end up being right, because Google may be the greatest earnings powerhouse of any new company I’ve ever seen. Google’s combination of amazing word-of-mouth affection—the company spends virtually no money on advertising, yet everyone’s heard of it—and its ability to make money for its advertisers in a totally accountable way make it the only media company the next generation may ever know about or need. Think about it. If you click on a phrase like “Hurricane Katrina,” you feel lucky to be directed to a free New York Times article that Bill Keller & Co. slaved over. At the same time, Google offers sponsored links tagged to the same phrase—say, from the Washington Post. Click on one of those and the advertiser gets a reader and Google rakes in the ad dollars. What irony: When we finally have a stock worthy of outrageous promotion, the shills are too fearful to tell you to own it!
Although Google’s about as dot-com-ish as you could ever get, the company has differed from all of that era’s overpromoted garbage from the get-go. Far from losing money, when it came public last year, Google was making it hand over fist. It didn’t need to go public for its growth or its branding. Management at Google declined to embrace Wall Street, choosing an unconventional offering that paid brokerages far less than typical underwritings and offering no real projections of how much it could make.
But once Google reported its first public quarter less than a year ago ($193 million in earnings), you could begin to see that the company might be on track to make not millions, or hundreds of millions, but billions of dollars—in profits, not revenues. That’s when the analysts should have been jumping up and down, telling you that Google was a must-own. Instead, they stayed mum, even as it became clear that Google might be able to earn as much as $5.50 per share this year, $7 next year, and $10 the year after.
Stock analysts, whether they are from the buy side (mutual funds, hedge funds, clients) or the sell side (brokerage-employed analysts who generate commissions with their calls), are supposed to try to figure out how to value stocks, forever searching for the cheapest to buy and eschewing the most expensive. Cheapness, however, is relative. A company can be valued in the hundreds of dollars in share price but still be cheap if it has the possibility of earning fabulous amounts of money in the future. Microsoft, for example, seemed like it was selling at a huge premium to other companies when it came public, but in retrospect it was dirt cheap when you considered how much money it could make down the line. It all depends on the multiple to earnings that you think a company should be awarded in the beauty contest that is the daily compilation of stock price.
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.
James J. Cramer is co-founder of TheStreet.com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time. At the time of this writing, he owned Yahoo. Get all of James J. Cramer’s stock picks via e-mail, before he makes the trades, by subscribing to Action Alert Plus. A two-week trial subscription is available at thestreet.com/aaplus.