Google’s stock has dropped below $400. So it’s a good time to revisit the company’s valuation.
Google’s enterprise value is about $125 billion and the company will generate about $4.5 billion of free cash flow this year. Google is therefore trading at about 27X current free cash flow.
This multiple is still on the high side, but it is far more reasonable than Google’s valuation than anytime in the last few years. As we’ve argued previously, we think a fair multiple for Google is about 20X-25X ($300-$375), and we’re finally close to that range.
What does this mean? It means Google’s stock is finally getting to the level where there should be good downside valuation support. If the company’s business really falls apart, the stock could drop below $300, but we don’t see that happening. We do think the stock could drop below $350, though.
In part because stock multiples are compressing across the market. And, more importantly, because we think the Street’s estimates for 2009 revenue growth are significantly too high.
We have heard that Google’s internal targets for 2009 call for about 15% revenue growth. This compares to Street estimates of 20%. Wall Street still expects a lot from Google, and we can’t see the stock resuming a sustainable upward course until expectations are once again low enough that the company can beat them.
Over the next few quarters, as the global economy weakens, we think analysts will gradually reduce their revenue estimates for Google in 2009. We expect the stock will continue to tread water (or worse) until they’re done.
(And, yes–we still think a 10-year $2000 target for Google is achievable. If the stock falls into the $200s, this would finally translate to a compelling 10-year return).
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