Google's Glass Ceiling Is Upward Of Its $1000 Target Price

| About: Alphabet Inc. (GOOG)

The $1000 price target assigned to Google (NASDAQ:GOOG) shares last week by Sanford C. Bernstein and CLSA is a curse according to CNBC's Jim Cramer. He jokingly said receiving the $1000 price target was akin to the jinx of appearing on the Sports Illustrated cover. That's because the two other companies receiving $1000 price targets were Qualcomm (NASDAQ:QCOM) back in the days of dotcom and telecom glory and more recently Apple (NASDAQ:AAPL). Obviously, neither of those two firms realized the $1000 dream, at least not yet. So you would think the same fate might await Google. However, I suspect the $1000 price target could prove conservative for Google, and for a few good reasons. Google's Internet presence is awesome and its Android mobile operating system established. What comes next could mix the two in a manner consumers cannot resist.

The Google Glass (featured in the video above) is a breakthrough innovation with the right degree of consumer appeal to succeed. Plus, it's got the right name on it; that being Google, representing what's new and cool. And oh what the Glass can do. The Google Glass is worn on the head like a pair of glasses, and allows the bearer to have a visual or audio response to the sort of questions one might pose on Google search; something like, "Where's the nearest Chinese restaurant," or "How do I say restaurant in Chinese" for someone looking for a restaurant in China. You can also take photos or record videos on command, and you are always at the ready to capture life's moments at a moment's notice. You can share those moments quickly as well. Plus, you can connect to your smartphone via Bluetooth. Google Glass could offer mobile phone utility value of its own if adapted awesomely by Google and adopted significantly by users. However, the company's approach thus far does not imply such a possibility, at least not in the near-term. If that were to occur though, the $1000 price target propped on the stock last week could prove deeply conservative.

Google Glass has the right buzz about it with tech blogs like TheVerge taking notice along with major financial media like CNBC. It's got that wow factor to gain the attention of consumers, and I think it could someday have the follow-through utility to pull market share from smartphone players Apple, Samsung (OTC:SSNLF), BlackBerry (NASDAQ:BBRY), Nokia (NYSE:NOK), etc. It'll be hard to manage Apps as it is now, but Google could package the Glass with an Android phone of its own I suppose. Google does not appear geared to go in that direction though, and like Microsoft (NASDAQ:MSFT), looks like it doesn't want to overstep its bounds and cannibalize its Android using partners. Yet, if it is then applicable to all phones, Glass might do just as well or better. Either way, Google wins with its innovative and patented design.

If it's not a phone of its own, it's a new product category of its own, and the next best gadget for geeks of all sorts. According to Google insiders, it will be available by the end of 2013, in time for the holidays for those who can afford it. Glass is the sort of product innovation Apple is known for, but the innovator of our age is experiencing a sort of dry spell today, and its shareholders are paying for it. Google's technology is disruptive, but it's not going to dislocate cameras or video products made by Sony (NYSE:SNE) and others, at least not at the premium price-point where it will likely be introduced. Neither is it going to severely strike into PC usage, so Dell (NASDAQ:DELL) doesn't have to add it to the threats against the ailing hardware maker.

I believe the product will speed the use of verbal commands in software applications of all sorts though, and that would make it a more competitive threat to tablets, mobile phones and everything else Americans are using for mobile computing today. Applications will stack up quickly for Glass - just look at these early ideas and the product site linked to atop this report.

Given its potential and the company's expansion into innovative electronics, GOOG is asking for P/E expansion and getting it. The P/E for GOOG is now 17.6X the consensus EPS estimate for 2013 (Dec.). What's interesting is that earnings estimates are being trimmed for 2013 and 2014, despite these innovative efforts. Some of this might be due to the rumored Google store build out. Over the last 90 days, the analysts' consensus EPS estimate for 2013 has come down 1.8%, to $45.52, and its 2014 estimate is down 3.0%, to $53.39. Current EPS growth expectations are for 14% this year, 17% in 2014 and about 14% for the next five years, according to Yahoo Finance. You can expect that long-term growth estimate to ratchet up if Google's ideas materialize into million dollar disruption. That's why the P/E expansion and the shares' recent appeal.

Chart forGoogle Inc.

Chart at Yahoo Finance

Google is attracting institutional attention, and according to Goldman Sachs, it's the top tech holding now of U.S. hedge funds, replacing Apple. Only AIG (NYSE:AIG) is owned more by hedge funds than Google today, according to the report and this article referencing it at Some 73% of hedge funds had Google as a top ten holding, according to the data.

Obviously, if Google can maintain market expectations and its current trailing multiple, it will be priced well above $1000 in a year. Moreover, the multiple is expanding on capital demand for the stock and improved expectations by the market. Add to that, expanding market risk taking, and the stock garners more ground, though its beta coefficient is just 1.16 currently. You can expect that figure to expand as well though if Google's efforts continue to intensify market expectations. Google's market cap is $265 billion, against Apple's $421 billion, but its revenues are one-third that of Apple. Google is certainly shaping up to be the most important competitor to Apple, and as it seeks a sort of hybrid model matching a little bit of Microsoft's old software game-plan and Apple's product innovation, it could survive and surpass each. Let's compare:


P/E Trailing

PEG on 2014 EPS & 2014 Growth Forecast










This comparison tells a story more than it helps us choose the best stock. It basically illustrates market skepticism about Apple's ability to keep its spot atop the hill. It certainly questions whether the company can continue to innovate and grow. It would appear the market believes Google is most likely to take the top spot, with Microsoft in the game. I think a good many readers would have to agree with this assessment of the situation.

What it says also is that a good portion of the expectations are already priced into GOOG. However, if the company could realize the market's expectations, a windfall awaits it. It's trailing P/E implies the stock could trade at $1138 a year from now if it stays on track and keeps the market's interest. But Google could also have a glass ceiling that could cause valuation contraction if all does not go as expected. Based on developments to date, I would not bet on that or against Google shares any time soon. I'm on the Google bandwagon with the hedge fund majority today.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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