Saturday, December 10, 2005

Analysts Late to the Google Party, Again

We've had a $500 target on Google for over two months.

On Friday, both Citi and CSFB raised their price estimates to the $475-490 range.

What took you guys so long?

Our thesis on Google hasn't changed, of course:

Google's earnings are violently accelerating.

Question is: just how much should investors pay for Google's impressive growth?

At $417, shares are far from cheap.

Google trades at 26 X sales (and 30 X book); as a basis for comparison, shares of Yahoo (YHOO) are fetching for just 12 X sales (and 8 X book).

The two are trading at roughly 70 X next year earnings.

If you tried hard enough, you could come up with fifty different reasons why Google shares are overpriced.

Still, when Google reports earnings on Jan 31, we believe that Google's detractors will receive yet another spanking.

Three reasons: One, billions of shoppers in search of "the perfect gift" will use Google's engine this coming Christmas -- that's going to hit Google's bottom line like a ton of bricks. Two, Google owns the online advertising space and deserves a premium over Yahoo -- market share matters. Lastly, Google's got something Yahoo doesn't -- more cash in the bank.

Google's $7 billion war chest (vs Yahoo's $3 billion coffer) will come in handy should Microsoft (MSFT) launch an attack in 2006.

We're reiterating our $500 target on Google, at which point Google will most likely split its stock.

On Monday, Google will join the Nasdaq 100 -- look for Google to gap up at Monday's open.

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