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Google $450?

Rick Aristotle Munarriz
October 25, 2005

Is $450 the next stop on the Google (Nasdaq: GOOG  ) freight train? Nearly a dozen analysts raised their estimates on the dot-com giant after the company's blowout third-quarter report. Three in particular -- Lehman Brothers, First Albany, and RBC Capital Markets -- declared $450 as the high-octane stock's new price target.

I can go off on price targets, the often ludicrous stuffed rabbits that analysts whisk around the oval racing track to tempt drooling four-legged investors. I guess I just did. However, ranting against puffy round phantom numbers isn't my intended target this time. Let's just call that passing shot collateral damage.

See, I am more concerned about the plausibility of Google hitting $450 in the near-term. It won't be easy. Yes, I am fully aware that Google went public at $85 just 14 months ago and has gone on to quadruple to $340. What's another 32% spurt in the grand scheme of things?

Plenty. No, I'm not bearish on Google. I've got a schoolboy crush on the online juggernaut. I'm carving "Munarriz Loves Google" on my desk with a penknife and I'm really hoping it'll let me take it to the prom in the spring. My problem is that we can't assume that Google's trajectory will continue skyward unchecked.

The company closed out its third quarter with 290 million diluted shares outstanding. That includes just a weighted sliver of the more than 14 million freshly minted shares that were sold by the company last month. So we're talking about a company with more than 300 million fully diluted shares out there at the moment.

We're talking about Google needing to be valued at nearly $33 billion more to earn that $450 price tag. If you had $135 billion burning a hole in your pocket, would swallowing Google in its entirety at $450 a share seem like a more prudent scheme than backing up the truck and loading up on penny candy and Twizzlers?

Winning the $450 betting pool
Yes, Google will be a $135 billion company someday. I believe it. It's why I think that shorting Google would also be a brutal mistake. It's just that the actual "Hey, Google hit $450" day may not come over the next few months or even over the next few quarters. Don't worry, I'll show my math.

Over the past four quarters, Google has generated an impressive $1.3 million in net profits. The $450 argument would seem to claim that Google is growing so quickly that paying better than 100 times that bottom line sum is a reasonable trade.

If we go by Google's awesome report from Thursday afternoon, where revenues soared by 96% and net profits grew even faster, it's easy to get excited. This is a scalable business, and the migration of marketers to the online platform is just getting started.

However, what does the future hold for Google? It has generated a whopping $5.3 billion in advertising sales over the past year, but how much more will it have to grow its top line to justify a $450 sticker price?

I'm asking this only because Google is going to be challenged in its efforts to keep growing. Until now, Google and Yahoo! (Nasdaq: YHOO  ) have ruled the lucrative keyword-based paid search goldmine, but it's now attracting new miners. Microsoft (Nasdaq: MSFT  ) is beta testing its AdCenter, while InterActiveCorp (Nasdaq: IACI  ) began selling paid listings on its popular Ask Jeeves search engine last month.

Google wallpapered the Web with its AdSense program, which allows even the smallest of content sites to duplicate Google ads on their sites. But now Yahoo! is starting to accept small publishers in its Yahoo! Publisher Network.

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