Google approaches $300

Bowling for Google

Shares of the top search engine are getting close to $300 and analysts still see more room to run.

May 25, 2005: 12:58 PM EDT
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) – Is Google on its way to hitting a perfect bowling score, a $300 stock price, in the near future? At Tuesday’s closing price of $256, it’s less than 20 percent away.

Shares of the leading search engine have been on a tear, shooting up 25 percent since the company reported much better than expected sales and earnings for the first quarter, thanks to a booming market for online advertising.

During the past month, Google (Research) has also released several new features — including a desktop search function for businesses and a beta version of a personalized home page tool — that should help the company remain competitive against rivals Yahoo! (Research) and Microsoft (Research).

Most recently, speculation that Google will soon be added to the S&P 500 index has helped propel the stock higher.

So is it possible that Google could continue climbing? Is $300 in the bag and should we be talking about Google hitting $350 or higher?

Investors still feel lucky
Crazy as it may sound, Google could still have a lot more upside. Sure, the stock price looks frothy on an absolute basis. Few companies have prices in the triple digits, let alone, approaching $300.

But Google has maintained that it would not split its stock to make the shares more affordable for the average investor. Clearly, that hasn’t hindered the stock’s performance.

In fact, data from Vickers Stock Research suggests that Google’s surge has been fueled by retail investors, not big mutual funds. According to Vickers, only 35 percent of Google’s shares are held by institutional investors while 73 percent of Yahoo!’s shares are owned by mutual funds and other money managers.

So what’s more important for investors to look at is not the dollar amount of Google’s stock price but what Google’s valuation is relative to its peers. And on that basis, Google still looks reasonably attractive, if not exactly cheap.

Shares trade at 50 times 2005 earnings estimates and 39 times 2006 projections. Yahoo!, on the other hand, trades at 64 times 2005 profit forecasts and has a P/E of 50 times 2006 estimates.

Steve Weinstein, an analyst with Pacific Crest Securities, said that Google’s fundamentals could justify a $330 stock price. At that level, Google would trade at a multiple in line with Yahoo!

If anything, Google looks to be the company that deserves the premium right now. It has reported stronger gains in sales and earnings than Yahoo! lately since Google has more exposure to the online advertising market, specifically ads tied to key word search results, than Yahoo!

“In the short-term, Google could grow faster than Yahoo!, as it has over the past few quarters,” said Marianne Wolk, an analyst with Susquehanna Financial Group.

To that end, earnings estimates for Google have risen at a meteoric pace.

Three months ago, analysts expected Google’s earnings to come in at $3.94 a share this year. Now the consensus estimate is $5.14 a share, an increase of 30 percent. Likewise, estimates for 2006 have surged nearly 30 percent in the past three months, from $5.14 a share to current projections of $6.56 a share.

By way of comparison, estimates for Yahoo! have increased by about 10 percent for 2005 and 2006 during the past three months.

Article continues here.

I sure wish I had purchased a few shares last year! Out of curiosity, did anyone here get in on this?