Google crashed through the $300 barrier this afternoon, only a month or so after smashing through $400. So, at $290, is it finally cheap?
“Pretty darn reasonably priced?” Yes.
At $290, Google’s enterprise value (excluding cash) is about $83 billion, or 15X trailing free cash flow of $5 billion. In last year’s market, that would have been bonified cheap, but valuations have gotten so hammered that today it just qualifies as reasonable.
Apple, in comparison, which is arguably just as strong a company as Google, is trading at only 10X free cash flow, and its market opportunity is much less penetrated than Google’s. Apple is cheap. Google isn’t quite there yet.
The other problem for Google’s stock, as we’ve been saying for months, is that estimates still have to come down. The street has begun chopping estimates for Q4–even optimistic analysts are now only looking for 5% sequential growth, which is startlingly low for Q4–but 2009 consensus is still calling for nearly 20% revenue growth. That would be miraculous at this point.
So, bottom line, Google’s stock is finally reasonably priced. You probably won’t see a sustained rally until analysts really pare back their 2009 estimates (which will create the opportunity for upside). But the lower the stock goes, the closer we should be to a valuation floor. And–good news–the higher the long-term return should be. (When we walked through that Google-$2000-in-a-decade scenario last summer, we said we hoped the stock would drop to $200 in the meantime so we could get a 10X return. Looks like we might get that chance.)
That said, we can’t think of a reason why Google couldn’t trade at the same cash flow multiple as Apple. And, all things being equal, that would be another 30% downside ($200).
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