Google Appears Fairly Valued at $440 (GOOG)

Apr.24.06 | About: Alphabet Inc. (GOOG)

Google's (NASDAQ:GOOG) Q1 2006 numbers released Thursday sent the stock sharply higher Friday.

Y/Y quarterly revenue growth of 79% ($2.253B/$1.256B), operating income growth of 67% ($742M/$443M), net income growth of 60% ($592M/$369M). That growth justifies an operating P/E something like double the market multiple. Annualizing current operating earnings, and diluting their share base forward gives a conservative forward operating EPS of $9.21 ($742Mx4/304Mx1.06) and at a current share price of ca. $450 that gives a forward operating P/E of 48 ($450/$9.21), which is just about right. Doing the same calculation but using net earnings gives them a forward P/E of 61.

On the other hand, if we use the last Y/Y growth rates to project operating and net earnings, and assume completely linear growth, that gives them a forward operating P/E of 46.8 ($450/($742Mx1.67x(1/4+2/4+3/4+4/4)/(304Mx1.06))) and a forward net P/E of 61 ($450/($592Mx1.60x(10/4)/(304Mx1.06))) -- again just about right. They are neither over nor under-valued by these measure.

They plan increased capital expenditures, but also increased and improved product rollouts, so those compensating effects do not sway the estimate one way or the other.


  • Google Inc. Q1 2006 Earnings Conference Call Transcript
  • Sell-side Reaction to Google earnings: Scott Devitt and Mark Mahaney