|Next stop, $500? Shares of Google have been on an unstoppable tear since going public last year.|
NEW YORK (CNN/Money) – To call Google a juggernaut would be an insult.
Merriam-Webster defines a juggernaut as "a massive inexorable force, campaign, movement, or object that crushes whatever is in its path."
But this word really doesn't capture how phenomenal Google's growth has been the past few quarters and how rapidly the stock has risen in recent months.
The leading search engine company has beaten consensus earnings estimates by an average of 21.6 percent a quarter during its first five quarters as a public company.
Shares of Google (Research) have nearly doubled this year and have surged about 350 percent since the company's initial public offering in August 2004. At Wednesday's close, the stock was trading at $398.15. So it only needs to head $1.85 higher to pass the rarified air that is the $400 level.
Google now has a market value of $116.6 billion. It is worth more than twice as much as its top rival Yahoo! (Research)
What's more, Google's market value is higher than computer giants Dell (Research) , Hewlett-Packard (Research) and even Cisco Systems (Research). It wasn't that long ago that some on Wall Street were touting Cisco as a company that could be the first to hit the trillion dollar market value.
It's not a stretch to suspect that Google could even soon eclipse two of the granddaddies of the tech industry, services and software giant IBM (Research) and semiconductor leader Intel (Research), in the not so distant future either. Big Blue has a market value of approximately $137 billion while Intel is worth about $150 billion.
A cheap $400 stock?
With all this in mind, can shares of Google possibly still be worth buying?
Many analysts say yes.
The bullish argument for Google is that the stock, despite its high sticker price, is actually not that expensive based on the most widely used method of valuing a stock – the price to earnings ratio.
Analysts expect Google to earn $8.47 a share in 2006. So the stock is currently trading at about 45 times next year's earnings estimates.
That's certainly a rich valuation but it is nowhere near the triple-digit price to earnings multiples that many Internet stocks fetched during the go-go days of the late 1990s and early 2000. It's also slightly cheaper than Yahoo!, which trades at 50 times 2006 earnings estimates.
What's more, Google's earnings are expected to increase by 44 percent in 2006. That means Google is trading at a valuation that is roughly in line with its projected growth rate, a level that several analysts said is reasonable.
"This is actually a fairly attractive multiple," said Mark Stahlman, an analyst with Caris & Co. "Many seem to be trapped in a time machine, namely that we're dealing with a bubble here. But I don't think that's the case."
To split or not to split
Still, will a $400 stock price scare off individual investors? After all, someone looking to invest say, $2500 in the stock market, could only afford about six shares of Google.
Martin Pyykkonen, an analyst with Hoefer & Arnett, said it's understandable for individuals to be wary of the stock.
But he argues that investors shouldn't be spooked by the high price since professional money managers, the so-called "buy side" firms, have shown an increased willingness to buy and hold the stock for the long haul, which should make the stock less volatile.
"A fair amount of buy side investors have gone from buying Google as a trade to people saying that it's now a core holding that they are not looking to trade in and out of. Sentiment wise, that's the biggest change with Google," he said.
But will Google soon reach a point where it will have to split its stock in order to keep the price attractive even to institutional investors? Companies typically announce stock splits when a stock reaches a high level. A stock split does nothing to change the value of a company however.
For example, if a company has 100 million shares trading at $20 a share and it announces a 2 for 1 split, the company will then have 200 million shares trading at $10 following the split.
Stahlman thinks a split is inevitable down the road but Pyykkonen is not so sure.
"The company has so far given no indication about plans for a stock split. But whether someday we're at a Berkshire Hathaway stock price, who knows?" Pyykkonen said, referring to the holding company controlled by investing guru Warren Buffett, who does not believe in stock splits.
Berkshire Hathaway's "A" (Research) stock currently trade at a price of about $86,600 a share while the "B" shares (Research) trade at a more thrifty $2,834.
Some reasons for caution
Still, even though Google bears are hard to find, there are some concerns that Google cannot post the type of strong levels of sales and earnings growth that investors have become accustomed to indefinitely.
Many large tech firms have found it tougher to satisfy Wall Street once they began to mature. Microsoft, Dell and Cisco are perfect examples of this.
In addition, it's not as if Google has a monopoly on the online ad business. Yahoo! remains a fierce competitor and Microsoft has stepped up its Web efforts, most recently unveiling a service called Windows Live, an Internet-based software service that will primarily be supported by advertising revenue as opposed to subscriptions.
The threat from Yahoo! and Microsoft, as well as other potential rivals like IAC/InterActive (Research), which owns Ask Jeeves, has Scott Kessler, an analyst with Standard & Poor's worried enough to rate Google's stock a "hold."
"There's no question that greater competition from companies like Microsoft and Yahoo! and probably IAC/InterActive at some point has to detract from the revenue growth and margin possibilities for Google," Kessler said.
However, he conceded that it's tough to fight momentum.
"Don't get me wrong. Google has done a great job and there has been no problem with execution," Kessler said. "I'm not recommending people sell Google. It's done amazingly well but the real issue is what will it do in the future?"
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Analysts quoted in this story do not own shares of Google and their firms have no investment banking relationships with the company.