So why such a steep drop in such a short period of time, above and beyond the broader market downdraft? There's a sentiment that the upcoming spread spectrum wireless auction could saddle Google with some extreme expenses, both short and long term. And then there's the uncertainty that even though the auction begins later this month, the results won't be known until March 24. That's a lot of time to wax and wane and ruminate over what the auction may and may not mean for Google shares.
Also, Google has committed to spending at least $4 billion if it wins the auction. "At least." If Google wins the auction, no one seems to know exactly how much the company might ultimately pay. We know the floor, but what's the ceiling?
And let's say Google does win. What happens next? All these billions are merely for the "rights" to the wireless spectrum. At some point, the actual network needs to be built out, either by Google or as-yet-to-be-named partners. We don't know who they would be, or how much they'd spend, but the wisdom on Wall Street suggests such a network could run another $5 billion to $10 billion more.
Sure, Google can afford all this. The company's got a massive cash position. But this is big money, even for a company like Google in a sector of technology in which Google has not demonstrated any competence. Don't get me wrong: I have said for some time that Google needs to explore new revenue streams and wireless is an area the company cannot afford to ignore, so I'm all in favor of Google going after this particular initiative. But all this uncertainty continues to hang over the shares and it won't be going away any time soon.
So, how low can Google shares go? Do the math: Last year, Google shares traded in a range of 25x to 35x forward earnings. The Street is looking for Google to post $21 a share in 2008 in earnings per share. At 35x earnings, Google would be trading at around $735, or near the high it reached last November. It's been sliding ever since. If you take the P/E range it traded in last year and apply to expected EPS this year, at 25x, we're talking about a stock at $525, or well below today's $611 price tag. Could it get there? Sure. Is it likely? Maybe.
I'm not saying it will or won't, but don't fool yourself. The possibility is real. The markets are very skittish and Google is one of the top names with a big target on its back, thanks to a nice rise through November of last year. Earnings for this company at the end of this month become all the more important and will enjoy an even brighter spotlight than normal.
Me? I'm looking at the fundamentals at this company: it owns search; the DoubleClick deal is done and that could mean a strong new revenue stream earlier rather than later; and the spread spectrum wireless auction to me is a win-win no matter how it shakes out: either Google wins and can easily afford to build out what could become its most lucrative, long-term revenue stream, or it loses the auction and shares enjoy a relief rally because Google won't have to write a bunch of big checks.
Google at $600, trading below 30x forward earnings, is approaching bargain status.
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