Informed Investor

Warning: Don't Jump On The Google Ship

Warning: Don't jump on the Todd Sullivan ship

Todd your argument is weak and inaccurate. I must disclose that I do own Google and bought it at $190 so I have some bias. However, your evaluation is innacurate and lacking some important information.

"P/E in the stratosphere at 62 times 2006 earnings". 2006 earnings have not yet been reported. The 2006 numbers will be complete once they post 4th quarter numbers at the end of this month. You do accurately state later that the 2006 numbers are estimated to be $10.30/share. This would make the P/E (based on $489 share price) 47 times 2006 earnings or 24% less than you quoted. To say a P/E ratio of 62 is in the stratosphere is quite baseless. Growth stocks trade with P/Es that are 2 times growth quite often (see SBUX, BIDU, even value play MSFT does). So looking at "~30%" growth for Google in 2007 would have a P/E of 60 be in the ballpark. If you follow the stock, you may remember it wasn't long ago that the P/E was ~130 or roughly 2 times the 65% revenue growth rate expected for 2006, which will likely be exceeded.

If you use this math and say earnings for 2007 are 13.85 (~34% growth not the 30% growth you quoted) and you go with the estimates that earnings will grow 32.5% for 2008 that would put you at a $900 per share price. I by no means expect Google to go to $900 this year but to say it is overpriced may be a stretch.

I don't claim that what I've written is something to base an investment on. You must do your own due diligence and consider numerous factors. P/E is one very telling factor, but not the only and can easily be manipulated to justify just about any price target.

Look at the historical chart for MSFT. From 1995 to 1997 it tripled (and I'm sure many "warned not to jump on the MSFT ship", from 1997 to 1999 it nearly tripled again. In 2000 MSFT did get a nice haircut and dropped nearly 50%. No, investing in growth stocks is never safe, and there is always the risk of such a correction. However, I believe these warnings are a bit premature for Google and it remains a solid growth company. The search market is increasing, they have the dominant, almost monopolistic, position in the market (see article below).
www.thestreet.com/_yah...;cm_cat=FREE&c...

To end my warning, I would say don't solely trust soemone who writes with sensational claims like Todd Sullivan, but include the sound, research-based price targets of research analysts. And of course it is always valuable to consider all viewpoints.