Google's Next Stop: $700?

Google (Nasdaq: GOOG  ) closed at $625.39 yesterday.

Can you inscribe that with frosting on a cake? It may be an all-time high for the stock, but I'm guessing that price didn't flood any bakeries with orders for $625.39 cakes. Analysts, media, and investors prefer to deal in nice, round numbers.

Unfortunately, Google won't comply. Like a bat out of Mountain View, Google barreled past the $600 mark on Monday, and it hasn't bothered to look back. Three days ago, folks were debating whether Google's next stop would be $700, or back down to $500. Now it's easy to imagine the talk ranging from $700 to $1,000.

It's funny what a few days of heady gains will do to shake out the worrywarts. It's also a kick to see the round-number fetishes come out whenever Google crosses a 100-point milestone. My favorite reaction is the whole $500 vs. $700 debate -- as if $600 is now some important midpoint, and the market is supposed to perch itself at either 100-point bookend.

Let me show you why that's a silly debate.

Milestone

Date

Subsequent Low

100

8/19/04

$95.96

200

11/3/04

$161.31

300

6/27/05

$273.35

400

11/17/05

$331.55

500

11/21/06

$437.00

600

10/8/07

???

Much as I hate to make my point with those same round numbers, do you notice something? The stock has yet to hit an earlier milestone after crossing a new one. Sure, it can get pretty close, but why buck the trend? If you were offered even odds on picking $500 or $700 as Google's next stop earlier this week, it'd make sense to pick the higher bookend. I'd say that even if Google had closed at $575 yesterday.

Obviously, the percentages get smaller as the milestones get higher. Google shares would have to lose half of their value at $200 to get to $100 three years ago. However, it would take just a 17% slide to go from $600 to $500 now. Then again, the same can be said of hitting the higher milestone.

Keeping that percentage metric in mind, do you notice something else peculiar about the company's milestone field trips? Even though the gains required to hit the last few century marks have been smaller on a percentage basis, it's taken the company progressively longer to reach each one. What used to be monthly waits between milestones have become annual tests of patience.

Google still smells like a growth stock, but it's certainly starting to trade like a steadier blue chip. As the company closes in on a whopping $200 billion market cap, it's safe to say that today's investors aren't buying into another six-bagger over the next three years.

So let's get into the only question that really matters at this point. Fancy milestones aside, what is Google worth?

Pricing Big G
It's easy to wonder whether Google's valuation is justified, especially when you compare the company to other dot-com bellwethers. Is Google really worth four eBays (Nasdaq: EBAY  ) , five Yahoo!s (Nasdaq: YHOO  ) , or 17 Baidus (Nasdaq: BIDU  ) ?

The market says so -- it always does -- but can you trust that judgment? After all, the fluctuating ticker tape is a perpetual gauge of the collective opinion of a company's worth. Right now, Google buyers and sellers have drawn the line of supply and demand at $625-ish.

Multiples don't necessarily move that line. Google trades at 14 times trailing revenue, and just more than 50 times trailing earnings. That may seem a little steep, but Google is also a high-margin company (justifying its lofty price-to-sales ratio), and it's growing profits quickly (shoring up its high price-to-earnings ratio). That line in the sand, where buyers are hesitant to buy any higher and sellers are hesitant to sell any lower? It was drawn at $625.39 yesterday, and all of the market's past perceptions and future expectations are baked into that price.

So what does move the line? Overall market sentiment, company-specific developments, and earnings surprises. Since even Nostradamus would be hard-pressed to tackle the first two factors, let's dig into those bottom-line surprises.

They can cut both ways, you know. Companies miss. Companies trounce. You'll find that stocks with superior returns, Google included, typically post mostly positive surprises. Big G has beaten Wall Street's estimates in 10 of its first dozen quarters as a public company.

That's pretty good. Can it get better? Sure. Here are a few other companies with impressive hitting streaks:

Company

Consecutive
Market-Beating
Quarters

Intuitive Surgical (Nasdaq: ISRG  )

19

Apple (Nasdaq: AAPL  )

18

Disney (NYSE: DIS  )

9

It's no surprise to see Intuitive Surgical and Apple soaring as stocks in recent years, after humbling Wall Street during every passing quarter. Remember how Google has been slow in reaching subsequent milestones lately? One of its misses happened on the way to $500. The other happened three months ago, on the way to $600.

Misses are speed bumps. So where's Google's next stop? The trend suggests that shares will keep climbing, but check back next Thursday, when Google posts its third-quarter earnings. More than any talk of round, juicy milestones, those numbers will ultimately give the stock driving directions.

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