One of the tools I use to look at a company is:
http://yahoo.smartmoney.com/pricecheck/index.cfm?story=worksheet&symbol=goog&nav=pc_ra&priceCheck=Check
Like any tool, it’s only as good as the person who uses it as it plugs in analyst assumptions and runs a quick value model but at least it lets you play with the assumptions and do some what ifs.
IF you use Google’s current projected (based on analyst estimates that haven’t changed since their “brilliant” presentation week – yet) growth of 32% you can see that the calculator values the company at $223 per share.
BUT 32% annual growth, even assuming they keep up last year’s stellar margins of 60% gross profit and 25% net profit they would still need to do the following:
2005 ended with $6Bn in sales and $1.5Bn (I’m being generous) in profits 32% =:
2006: $8Bn in sales and $2Bn in profit ($7 per share)
2007: $10.5Bn sales and $2.6Bn in profit ($9.2 per share)
2008: $13.8Bn sales and $3.5Bn in profit ($12.3 per share)
2009: $17.6Bn sales and $4.7Bn in profit ($16.4 per share)
2010: $23.4Bn sales and $6.2Bn in profit ($21.9 per share)
Coming off a 2005 where profits were $5 per share vs. $1 per share in ’04 this may seem reasonable but here’s the rub:
Sales:
2000= $19K
2001 = $86K (+350%)
2002 = $439K (+400%)
2003= $1.45Bn (+250%)
2004= $3.3Bn (+ 100%)
2005 = $6.1Bn (+90%)
This is that famous law of diminishing returns everyone is worried about. If Google needs to keep growing at “just” 32% it must sell $23Bn in ads (or whatever) within 5 years or it will be a massive disappointment.
The big problem here (and there are many, many smaller ones) is that Forrester Research says that the ENTIRE Internet Advertising Market will be just $26Bn by 2009 (and that’s 150% growth).
http://biz.yahoo.com/rb/060312/microsoft_advertising.html?.v=1
So Google needs to capture 100% of that market to hit its numbers. Last year MSN, who is just making a move this year, had $1.4Bn in ad revenue while Yahoo captured $4.6Bn (I don’t have AOL figures but let’s call it the mean of $3Bn).
That means Google needs to move it’s market share from 40% now to 100% in 2010 without cutting into their margins! They need to force AOL and Yahoo completely out of business and get Microsoft to leave the Web entirely as well as keep out any Google-like upstarts who may come along in the next 5 years and do to Google what they did to Alta Vista, Lycos, Excite, Ask Jeeves and all the other Y2K superstars of the pre-Google search market.
Now Yahoo had been growing faster than Google in 2004 (+120% – I kid you not) and about the same in ’05 and their profits are already at $2Bn on $5.2Bn in sales so they might not go without a fight.
Look how Yahoo got punished for slowing from 120% to 95% top-line growth even though net profits climbed from $399M to $1.5Bn from ’04 to ’05:
http://stockcharts.com/gallery/?yhoo
Down 20% from their 200 dma! Say, isn’t there some other company that just crossed their 200 dma recently? Yahoo’s earnings report was 1/17, that was 2 weeks before Google’s and Yahoo was at $43 while Google was at $430 before their earnings so, just because Yahoo dropped to $30 from its 200 dma of $36 how could you possibly call that a pattern when Google crosses its 200 dma at $345? See, totally different!
I mean, come on – Yahoo’s current p/e is 24 and Google’s is 67 so Google must be a better company – right?
MSN is backed by Microsoft who I hear are pretty tough competitors while AOL still has 26M subscribers who give them $15 a month. Don’t forget Apple who have grown their share of the desktop from 2.8-3.6% this year and Safari has it’s own search engine…
What if they all stay in the game? Well if Google doesn’t put them all out of business but does maintain it’s market share and profit margins for the next 5 years they will still have 40% – heck, let’s give them 50% of the market in 2010. That still gives them $13Bn in on-line ad sales, more than double this year’s total, not too shabby… If they keep up net profits of 25% that will translate into a neat $3.5Bn in earnings, about $11 per share in 2010.
That sounds realistic to me and I think I would buy them that year with a Yahoo or Microsoft p/e of 23 for $253 a share, as long as they come up with a plan for growth by then!
