Google Earnings Revised Downward, But It Still Looks Good for 2009

We all knew this would happen, but right now it's playing out the way I thought it might. I read an analyst's report on the flight out tonight that suggests the near term price target for Google (GOOG) is $350, down from $450 because Google's revenues next year are likely to grow in the single digits. They predict 6-7pcnt growth next year down from 15pcnt.

But they also believe Google will take $500mm out of projected operating costs next year and will still deliver over $10.8bn of EBIDA. At 10x EBITDA, an attractive multiple for a franchise like Google's, that's $108bn of enterprise value. If you add their cash, you get a market value of $130bn which translates to about $400/share.

I am not saying Google's going to $400 any time soon. There's too much selling still going on. Tax loss selling will certainly be taking a toll on stocks for the remainder of the year. But when investors start looking at places to put money back to work in 2009, I wouldn't be surprised to see Google get some attention. With just one significant revenue stream, it's forecasted to generate over $10bn of cash flow.

And with services like YouTube, Maps/local, productivity (docs, calendar, mail), and android, none of which have been run like real businesses yet, I think it should get back to $500/share within a couple years assuming no real change in market multiples.

I bought the stock aggressively on its way down and made most of my purchases between $320 and $275 and went in with a big slug at $280 around three weeks ago. I think we've seen the bottom in Google. We may retest it one or more times (which should be buying opportunities if it happens), but I don't think we'll see the stock go below $200 under any scenario.

I also think we've seen the bottoms in Apple (AAPL) and Amazon (AMZN) two other stocks I've been aggressively buying on the way down. Of course time will tell whether we are heading into a 'lost decade'. With billions going up in vapor every time I open up the paper (TARP, autos, Madoff, hedge fund collapses, etc.) we are certainly living in a much poorer world and it's reasonable to expect that stock prices will reflect lower overall amounts of investable capital.

But you've got to put money to work if you want to make some of that lost capital back and I think the titans of web tech are one good place to do that starting in early 2009.

Comments

[bruce:]

I definitely agree that there is very little the company needs to do to provide excellent returns for investors. That seemed pretty obvious when I updated my analysis from a couple of years ago where I used FCF multiples:

20tickers.com/?p=36

With the way the company pumps out cash a pull-back on CapEx (even in a no-growth scenario) makes GOOG a very attractive stock right now.

2008 Dec 16 11:04 PM