Sunday, December 04, 2005

Google's First Hiccup: What Next?

This past week, for just the second time in the company's short history, shares of Google were downgraded.

We were beginning to get worried ourselves.

Last week, nine insiders at Google sold $380 million dollars worth of stock.

Cause for concern?


Because of "payment procedures" and built in trading plans, insiders at tech companies are inherent sellers (see this weekend's Barron's).

It's when insiders sell stock erratically that one should worry.

In Google's case, an insider selling frenzy was expected, given the stock's astronomical rise post IPO.

We try to remain focused on Google as a business.

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.

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