What’s Google worth?
Let’s ask the analysts:
- Heath Terry at CSFB says GOOG will trade at $900 in a year.
- Mark Mahaney at Citi says $775
- Mark May at Needham says $690.
$690 to $900? That’s a pretty huge range. So who’s right?
Answer: No one knows.
That’s right. No one. Not even these highly trained professionals. Why? Because what Google will be worth in a year depends on what happens over the next year, and no one knows what will happen over the next year…
So are the analysts just pulling these numbers out of their respective a**es?
Well, sort of. It’s more charitable to say they’re doing the best they can to handicap an uncertain future. For example, Citi’s Mark Mahaney bases his $775 target on 2009 projected EPS of $23/share and a forward P/E multiple (in late 2008) of about 35X. Mark has carefully projected those earnings estimates, and his multiple analysis is perfectly defensible: He’s assuming Google will trade at the same forward P/E in a year that it’s trading at today. Needham’s May, on the other hand, projects only $22/share in 2009 earnings and thinks Google’s P/E multiple will compress to about 28X. That’s a reasonable assumption, too: Google’s earnings growth is slowing, why shouldn’t the multiple compress? Voila–$690!
And here are some plausible scenarios most analysts aren’t projecting:
- Google could blow a quarter, sending the stock’s multiple AND 2009 earnings estimates plummeting. This could yield a reasonable price target of $250-$300. This is perfectly plausible: All other companies miss quarters and the overall market is tanking–so why should Google be immune?
- Google could continue to blow out quarters, free cash flow could continue to accelerate, and the multiple and earnings estimates could rise! This could get you to $1,000 a share or more–also perfectly plausible.
So you see: No one has any idea what Google is worth, not even Wall Street’s top professionals. They’re just gazing into the same hazy future as you are (and, for compliance and other reasons, trying to add precision where there is none). If Wall Street analysts knew the future, they could tell you exactly what Google is worth, but they don’t. Sorry about that.