Google’s earnings are growing so rapidly that not even the stock-market bulls can keep up.
Blown away by the online search engine leader’s first-quarter profit, securities analysts raised their already high expectations for Google and investors scrambled on Friday to buy a piece of a company that is drawing comparisons with some of high-technology’s greatest growth stocks of the past.
The fervour lifted Google’s stock to a new high on an otherwise dismal day on Wall Street.
Google’s shares traded as high as $224 on the Nasdaq Stock Market before retreating later in the day. By the time Nasdaq closed, Google’s shares stood at $215,81, a gain of $11,59, or 5,7%.
Investors are rewarding the Mountain View-based company for the moneymaking prowess of its Internet search engine, which generates revenue by distributing text-based ads on Google’s home page and thousands of other websites.
Google gets paid whenever someone clicks on the commercial links — something that’s happening with increasing frequency, prodding advertisers to pay a higher price to have their messages displayed.
That dynamic is boosting Google’s profits way beyond the most optimistic scenarios that were envisioned when the company first sold its shares for $85 in an initial public offering completed eight months ago.
In the first quarter, the company earned $369,1-million, or $1,29 per share, on revenue of $1,26-billion. The earnings, nearly a six-fold improvement from the same time last year, were 40% above the mean analyst estimate of 92 cents — a figure that reflected Wall Street’s heightened expectations after Google obliterated estimates in the final quarter of 2004.
Analysts recalculated again on Friday, with some raising their future earnings estimates by 20% to 30%.
ThinkEquity analyst John Tinker was among the most bullish, predicting earnings per share of $5,13 for this year, up from $3,93 before Google announced its first-quarter earnings. Tinker expects Google’s 2006 earnings to rise by another 30% to $6,67 per share, emboldening him to predict the company’s shares could reach $330 within the next year.
American Technology Research analyst Mark Mahaney is almost as bullish, raising his price target for Google’s shares from $275 to $290.
The mean analyst estimate for Google’s quarter ending in June rose to $1,09 per share on Friday, up from 93 cents per share on Thursday, according to Thomson Financial.
Despite the higher profit estimates, Google’s stock looks expensive. Using Tinker’s 2005 profit estimates for the company, Google’s shares carry a price-to-earnings ratio of nearly 42, considered a fairly high multiple for a measure that is widely used to appraise a company’s value.
Investors are betting Google’s growth will continue to accelerate, justifying the company’s lofty stock price.
”A really successful high-tech company tends to grow into its valuation,” said Janco Partners analyst Martin Pyykkonen, pointing to past success stories such as Microsoft and Cisco Systems.
Pyykkonen isn’t as enthusiastic about Google’s stock as most analysts. He worries the company is too dependent on search-based advertising, making Google more likely to stumble if conditions in the sector weaken.
Google’s fat profit margins also might thin if it’s forced to pay bigger commissions to the websites that form its advertising network, Mahaney said.
Both Microsoft’s MSN and Yahoo could apply more pricing pressure by trying to persuade Google’s partners to defect and join their competing search engines.
The run-up in Google’s stock also makes it more likely that many of the company’s 3 500 employees will sell some of their own shares to lock in profits during the next few weeks, predicted Caris & Co analyst David Garrity. If that happens, Google’s stock price is likely to dip.
But the biggest threat to Google’s stock price could be the company’s tremendous success so far.
Unlike most publicly held companies, Google steadfastly refuses to forecast its future earnings, leaving it to analysts to try to figure it out on their own. So far, analysts have underestimated Google’s profits, but they might eventually raise the bar beyond the company’s reach, Pyykkonen said.
If that happens, Google’s stock is likely to plunge, based on how investors treat most earnings disappointments.
”Google is a great company, but I wouldn’t want to be holding the stock on the day it misses expectations for the first time,” said Silicon Valley software executive Robert Shaw, who sold his stake in the company for $180 per share a couple months ago. — Sapa-AP