Google $200 or Google $400?

What do professional bowlers and Google (Nasdaq: GOOG  ) have in common? As of last night's close, they would both love to be at 300.

Shares of the search engine giant closed below the $300 mark yesterday. Sure, Google has been here before. It was here just two months ago. Sadly, it was also here in the summer of 2005, just 10 months after going public. However, if the financial media was quick to cover Google's round milestones on the way up, it only makes sense to revisit those same markers on the way down.

Some may argue that it's just karma biting Google's tail. The company recently infuriated many investors by repricing its employee stock options. This also comes at a time when there are renewed rumblings of Microsoft (Nasdaq: MSFT  ) standing on Yahoo!'s (Nasdaq: YHOO  ) shoulders to make a more potent enemy for Google to vanquish.

Mr. Market isn't a grudge-bearing monster, though. It simply responds to fundamentals and the simple laws of supply and demand. Investors, quite frankly, fear that Google isn't immune to an advertising slowdown. Analysts are feeling it too, talking down the company's profit targets in recent weeks and months.

Timeframe

2009 EPS estimate

90 Days Ago

$22.50

60 Days Ago

$21.50

30 Days Ago

$21.20

7 Days Ago

$21.19

Today

$21.07

Source: Yahoo! Finance.

The pessimism isn't limited to just this year. Wall Street sees the company earning $24.29 a share next year, well off the $25.65 a share it was banking on just three month ago.

So, where is Google's next stop? $200? $400? Let's check out both scenarios.

The case for Google at $400
The good news is that at least Google is growing. The latest guesstimates find Big G's bottom line growing by 8% this year and 15% come 2010. So, even if Google is trading at a historically cheap forward earnings multiple in the mid teens, the same can be said of its near-term growth projections.

If that last point sounds bearish, let's take Google all the way down to $200. If the profit expectations bear out, Google would be trading at just 9.5 times this year's earnings and only 8.2 times next year's projected net income.

That doesn't seem likely, does it? Even if cynics rightfully point out that the trend is clearly leaning towards Wall Street's mavens taking Google's projected profitability lower, it's hard to fathom Google getting that cheap unless there is complete collapse of the company's business model.

It can happen, but that is not likely in the near term.

Along the way, Google is a company that derives nearly all of its revenue from online advertising. There is plenty of growth potential there and in other related areas.

It already has the fleet of servers, so it's not completely unbelievable to see it take on companies like salesforce.com (NYSE: CRM  ) in cloud computing customer relationship management apps, Akamai (Nasdaq: AKAM  ) in content-delivery networks, and Rackspace (NYSE: RAX  ) in cloud computing hosting.

It also has a ton of money in the bank, so let's not assume that growth will be strictly organic. It may have overpaid for DoubleClick and YouTube when the market was peaking, but there are now plenty of bargains at closeout prices that won't last if the market bounces back.

The case for Google at $200
At the bearish end of the betting line, inertia has certainly been pushing Google lower since peaking in November of 2007.

Google may have blown away analyst expectations with its surprisingly potent fourth-quarter results, but the economy has also gotten worse so far in 2009. Google isn't immune to the economic malaise, even if it's benefiting from the online migration of both people and sponsors. It also isn't immune to the inevitable moment when someone comes up with a better mousetrap.

What is the future of search, after all? The popularity of social networking sites like Facebook and News Corp.'s (NYSE: NWS  ) MySpace is making people less dependent on search. If they're looking for a good dentist in the neighborhood or want to know about a new sushi bar that opened, they have a growing army of old acquaintances to lean on.

In other words, even if someone doesn't come up with a more magnetic search engine over the coming years, the relevance of search queries and paid search may fade in time.

I don't see it happening. That's why my bet would be on Google at $400 over Google breaking below the $200 milestone.

How about you? Do you see Google hitting $200 or $400 next? Let me know in the comment box below.

Read up on Google:

Microsoft is a Motley Fool Inside Value recommendation. Akamai Technologies, salesforce.com, and Google are Motley Fool Rule Breakers selections. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz has never bowled a 300. He once bowled a 224, and that's it. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (9)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 10, 2009, at 3:31 PM, Eerkes wrote:

    im betting on the broad-based search engines losing their relevance. in my infantile internet days, these search engines got me everywhere. as i have grown in my internet capabilities, i now use more specific-type searches for work and school. however, gmail is the best e-mail system ever, and everybody who tries it uses it, and youtube is the favorite site of 97% of the world. so maybe its a wash and google just stays at 300.

  • Report this Comment On March 10, 2009, at 6:04 PM, passiveinvestor wrote:

    Google's long term moves will depend on the fundamentals of executing a potentially broad-based strategy:

    1. Can they take advantage of cloud-computing to capture the productivity software market away from MSFT - Google Docs essentially. MAYBE? There is resistance de to questions of security?

    2. Can they take a portion of the ecommerce market from Paypal and Amazon. Google Checkout - empowering small business owners? Could they grab these people from AMZN? POSSIBLY - if they stick to their CORE SIMPLE TO USE philosophy.

    3. Can they augment search to ceate a more relational result set? Search is not sufficient. Intelligent Search is now required. Some new companies like evri.com, newsvine.com are emerging here - poor product development but the right strategic direction. HIGHLY LIKELY.

    4. Can they bring monetisation to video with a unique advertising offering - YouTube monetisation essential. If they can offer porducers a moneitsation potential equialent to other platforms like TV this will be a very high growth opportunity. DIFFICULT but POSSIBLE long term 5-10 years.

    Since they have the money, the talent and the potential my bet is they could pull off at least two of the four above in the next couple to three years.

  • Report this Comment On March 11, 2009, at 9:46 AM, actuary99 wrote:

    I think a good question would be asking when social networking sites will start losing their relevance. The whole appeal has gone away for me since it has become available to anyone and the privacy standards have lowered. I used to lose a lot in college, but now with a job and a fiance, I use it close to 0.

    Contrast this with my Google use, which has skyrocketed.

    As for social networking sites taking away from Google's searches, bear in mind that many people use the internet mostly at work, and many people cannot use social networking sites at work. Even if they can use these sites, many are likely wary of doing so, as they probably want to at least give the impression they are working.

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