Google $500: Buy, Sell, or Hold?

Google (Nasdaq: GOOG  ) frightens me. In fact, I told my Foolish colleague Brian Richards last month that I was swearing off the company. No more searching, no more Gmail, no more scouring Mars for waterfront property. Frankly, I fear Google's vast data centers are up to something dastardly.

Of course, I can't stop Googling. I'm hooked on the search engine, and on all the neat add-ons that Google Labs keeps bubbling up.

What does this have to do with Google nearing the nice round number of $500 per share?

There's no ceiling like a glass ceiling
A few weeks back, Brian and I speculated on whether Google would become the world's first $100 trillion company, and if so, when. We decided that if a $100 trillion market cap was in the cards, 2070 would be the magic year.

And we got a lot of email about that prediction. Some people said it would happen sooner; some, never. Even more wondered whether Google even deserved its hefty $150 billion market cap today. After all, is Google really worth more than competitors eBay (Nasdaq: EBAY  ) , Yahoo! (Nasdaq: YHOO  ) , and Amazon.com (Nasdaq: AMZN  ) combined? Google has roughly the same amount of revenue as Amazon and only modestly better margins than eBay and Yahoo!

Here's the thing: Google is overvalued relative to current financials and growth estimates. But that was also true way back at $200, when Fool David Forrest predicted Google would become a $1 trillion company. It was also true at $300, $400, and $450, just as it will be at $500. (If you want to see the math, check out Professor Aswath Damodaran's most recent spreadsheet, which values Google at $217 per share.)

Yet the stock keeps blowing by these nice round prices. What gives?

Seriously, what gives?
In a word, cachet. And that cachet may translate into growth that Professor Damodaran's model simply can't take into account. If you look at his revenue assumptions, he believes Google will grow revenue just 11% in 2014, and just 5% in 2016 and every year thereafter.

Is that realistic? Yes and no.

Most companies see revenue growth decline on a percentage basis as they become huge. That's a consequence of the law of large numbers. Moreover, no investor worth his salt would allow himself to be burned by running valuations with blindly optimistic assumptions.

But Google isn't most companies. It has a brand that inspires awe among Internet users, and legions of smart employees who are revolutionizing the way we use technology in everyday life. By 2016, the company (and its arguably crazy founders) may spur further growth by expanding into areas that we can't even guess at just yet.

The reason it's difficult to apply classic valuation techniques to a company like Google is because Google is smart enough, flexible enough, rich enough, and successful enough to do pretty much anything it wants. That potentially unprecedented ability to sustain high growth rates is one reason why investors think Google stock is worth more than twice what Professor Damodaran thinks it's worth.

The Foolish bottom line
So, to bring this article full circle, is Google a buy, sell, or hold at $500? How about none of the above? Personally, I'd go neither long nor short Google shares. At $500, there's a lot to love about Google -- and a lot to be scared of.

If you feel differently, or if you want to read more opinions on Google's prospects, click here to check out what others are saying about the company in our brand-new Motley Fool CAPS community-intelligence database. More than 2,000 investors have already registered their thoughts on Google -- and sentiment is decidedly mixed.

Tim Hansondoes not own shares of any company mentioned in this article. Yahoo!, eBay, and Amazon.com areMotley Fool Stock Advisorrecommendations. Please put the Fool'sdisclosure policyin a wheelchair and get it on a plane. Hurry, hurry, hurry, before it goes insane.


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