A week from today, Google will report its third quarter earnings and judging by the booming action in Google shares these past few weeks, it would appear investors are anticipating something truly extraordinary.
Google shares are up another 2% at this writing, knocking up against $640 a share, and about $1 billion under a staggering $200 billion market cap. This was a $450 stock in May. It's added $150 a share since late August! These are big, big moves and big, big optimism in a very short period of time.
Of course, analysts continue to toss kerosene on the flames: RBC Capital going to $690 from its far-outdated $560 target; and Stifel Nicolaus moving from $620 to $710 a share. Then of course there was Lehman's increase yesterday to $714 from $610. This kind of action ahead of earnings next week is a little surprising, given the mushroom cloud last quarter's earnings sent up when a surprise hiring binge sent costs so far out whack they killed margins. The conventional thinking is that after last quarter's surprise, the company would be taking extreme measures to avoid a repeat performance.
There's also the news from comScore that Google's global strength just keeps on humming along; the research group says Google overwhelmingly dominates worldwide search engines; that of the 61 billion searches conducted in August, 37.1 billion used Google and YouTube. Yahoo was way back in second place with only 8.5 billion searches. Google is beating its next closest competitor by a better than 4 to 1 margin.
So that's all good, but that pesky "law of large numbers" is rearing its ugly head again, at least for Citigroup's Mark Mahaney, who continues to be one of the Street's most thoughtful analysts on Google--that reasonable voice in the midst of all the market mayhem.
"You've had the large cap internet stocks that are up on average 35% year to date," he tells me this morning. But as he looks forward into 2008, he doesn't believe the factors lining up in 2007 that spurred that big rally will be around for a second year running. "We don't see the 30% return that you've seen this year," he says. "We think the return off of '08 estimates is gonna be much more modest, perhaps in the 10% range. It's kind of hard to tell, but that's the kind of upside you're going to see right from these price levels here."
That seems to a little bit of a buzz kill from the kinds of swirling optimism we're hearing elsewhere. He argues that analysts are increasing price targets based on 2009 estimates, not what the company will report in 2008. We're already in October, so those kinds of increases are reasonable.
Yet, for investors, time horizons become very important here: If you want to think about Google 1 to 2 two years out, the core business at the company remains robust. Display advertising, search is strong, mobile internet. Google continues to perform well.
The company is trading at what some say is a discount to 2008 earnings, about 30 times '08 EPS. But with a revenue slowdown likely, and margins flat to down, the stock growth for the company may be capped over the next several quarters. That means the kind of short term gains investors enjoyed this year, likely won't re-occur until the middle of next year. So, that longer-term time-horizon may serve investors well. Impatient investors jumping in now may get bitten.
I'm not saying I necessarily agree with that assessment, even though it makes a lot of sense. But Mahaney's analysis, counter as it might be to the momentum of the argument on the other side, is something worth considering; whether you're in Google now and wondering what to do next, or whether you're thinking about jumping in now. Either way, longer term, Google still seems like one heck of a good place to park your money.
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