Some people find it inappropriate or even rude to talk about money and business. We think those people are wrong, and on the fast-track to a lifetime of battling against Poverty. The way out? Education. If you travel abroad and don't speak the language, you are at a disadvantage. Yet here in the US, millions cannot understand the language that ultimately drives most decisions they make. Cash Talk is here so we can all better know the language of Money and Business. Enjoy and prosper.
Thursday, January 05, 2006
Google $600?
Piper Jaffray analyst Safa Rashtchy defends his price target of $600 a share for Google in today's Wall Street Journal.
Quick read, posted in the comments.
3 comments:
Anonymous
said...
How high can Google Inc.'s shares go?
The search giant's shares have more than quintupled since the company's initial public offering in August 2004 and finished Wednesday at $445.24. Of 36 analysts surveyed by Thomson First Call, 26 have a "buy" or "strong buy" rating on its shares, while just one recommends selling.
Analysts have been one-upping each other with ever-higher price targets, and this week Piper Jaffray & Co. Internet analyst Safa Rashtchy made headlines with a new $600 target for Google. That's up from his earlier 12-month price target of $445, issued in October.
His new $600 target would put Google shares at a whopping 68 times his projected 2006 pro-forma earnings of $8.82 a share. Mr. Rashtchy cites a somewhat more palatable multiple of 50 times earnings in his report by arguing investors should buy based on his new estimate for 2007 pro-forma earnings of $11.91 a share. Regardless, he says Google is an "iconic" company that warrants a lofty multiple. He talked to the Online Journal about his expectations for the company, and the risks Google faces.
(Mr. Rashtchy doesn't own shares of Google, but Piper Jaffray counts Google as an investment-banking client and makes a market in Google shares.)
You're one of the most bullish Google analysts out there. How do you defend this price target?
We really put Google in the league of companies like Microsoft or eBay: companies that created new markets, became the dominant players and provided several years of continued growth. These companies have traded well above 50 times [earnings estimates] in their peak years. …Search is continuing to grow, and Google is continuing to gain market share. We didn't expect them to gain share in 2005 and yet they gained 5%. That gives us confidence. By the way, I fully expect to increase our [earnings estimates] for 2007, so that the actual multiple could end up being in the 40s rather than in the 50s.
Why compare Google to eBay or Microsoft rather than, say, Yahoo?
A lot of the value Google has, in my book, has to do with its brand. Only companies such as eBay and Microsoft created that kind of brand awareness. Yahoo has been a great media company, but it hasn't created the same type of following that Google has. More than that, it is really paradigm-shifting companies that can deserve this kind of multiple and can have a great following among investors. Microsoft was really the only platform for computing for many years. EBay suddenly created an efficiency in the market that didn't exist before. Google, in the same way, has created a huge, multibillion dollar business that didn't really exist before and created a massive following.
Since initiating coverage of Google in April 2005, you've maintained an "outperform" rating and bumped up your one-year price target five times. Until now, the increase has been pretty incremental. So why the jump this time?
I felt that we were always trying to catch up with Google in terms of fundamentals and stock price because we were always very conservative with our estimates. Perhaps there was good reason to be more cautious as Google was just a young public company, and it didn't have as much of a track record of performance. Now, I feel that given what Google has [accomplished], I have a lot more confidence to be more realistic on our estimates, so that I don't have to do it every quarter. I'm not trying to be heroic or controversial or come up with a huge price target. I really felt that we don't really serve investors if I'm reactive. I like to look ahead.
You've covered the Internet industry through the bubble, the bust, and the recovery. Has your experience made you at all wary to attach high price targets to Internet companies?
I certainly had concerns about how our price target would be viewed, especially as Google had decided not to split the stock. …I don't want to be seen as hyping the market. Then again, when people look at the comparison with the dot-com bubble, at that time, we were talking about three to four times the valuations [we are today]. Most people would come up with "creative" new ways to justify valuation, like the value of an eyeball or a unique visitor. The main difference is that I can confidently go to investors and say this is the right price, because I can show them that this is within the historical range. That was never the case in the dot-com bubble.
Google publicly discloses very little information about itself. How does that affect your ratings?
I don't find it particularly difficult because of a couple of reasons. I've known Google nearly since it started. And also I've covered the search industry longer than other analysts. Google is so big that I liken it to Wal-Mart. If you know the retail market, you have a pretty good chance of knowing how Wal-Mart is doing. I study the broader search market. In reality, Google has a very easy business model. It's basically how many searches they have done times how much revenue they get per search.
Having said that, Google discloses very little. It poses some difficulty for analysts, but it really poses more risk for investors. Right now, it is a boom time for Google, and people aren't that worried about a lack of transparency. Should there be any slip or any miss from expectations, investors could be very concerned and there could be some selloff because investors wouldn't know what caused it. So, yes, it is a factor.
Do you think Google is a suitable investment for all investors? Haven't those who have yet to purchase the stock missed out on the lion's share of the gains?
I think that Google is a suitable investment for aggressive investors as well as for long-term investors. Look, our sector is pretty volatile, so it certainly isn't suitable for people who can't handle volatility in the near term. But I think Google is a solid company. If I could buy the stock, I would buy it for my son's college fund.
What would you recommend to those who bought Google more than a year ago when you initiated coverage? Should those investors take some profits or continue to wait it out?
I would continue to hold the stock. Obviously, it depends on each investor's liquidity needs, and I can see the urge to at least take some profit off, but given the outlook we see for the company for [2006] and beyond, I think they would be leaving some money on the table if they took profits now.
You've estimated 2006 revenue of $6.4 billion, up from $4 billion in 2005. Which new business lines do you see contributing significantly to Google's revenue this year, or do you simply expect online ad revenue to grow?
That's the interesting part. We really don't have any new revenue items in there in addition to the core search advertising revenue. We haven't really modeled anything else. Given that search revenue is so big, the additional revenue will take a while to contribute. You just can't move the needle that easily. But by the end of this year, we expect revenue from Google Base [classifieds] and Google's advertising network to become more meaningful.
Of all the new products Google has rolled out in recent months, which do you see as the most significant?
[Some that] have already built a good Google following and have helped Google even though they don't generate revenue are Google Mail and Google Maps. Those two products have become enormously successfully in a very short period of time. We see continued adoption of those two products.
In terms of new products that I'm most excited for, Google Base to me is the most exciting one. That could allow Google to create an entirely new source of information beyond what's available on the Web.
What is the single biggest risk to Google's business model? What about to the stock price?
As they get into new areas of content that haven't been mined yet, off-the-Web content or video content, they may not have the advantage that they had in finding and presenting Web content. …Other companies may gain advantage over them.
Related to that, if ever Google takes its eyes off the focus on user satisfaction, that's where they could really lose out to competition. That could potentially happen if there's an increase in advertisements listed on its pages or in other formats. That is not something I see right now for Google, but if the opportunity is too lucrative, it may hurt them.
In terms of the risk to the stock, probably the biggest risk is that, up to now, most analysts have been conservative with their estimates, simply because the growth was so big that we didn't believe it. Of course, everyone came out of the dot-com era, so we were being more conservative. After a while, analysts may become more bullish and could become too aggressive. Given that Google doesn't give guidance, they could miss [analysts'] expectations at some point.
You're estimating that the paid-search industry will grow to more than $33 billion in 2010 from $10 billion in 2005. Where will all that growth come from?
I think that we will have many more advertisers. Right now, globally, we may have half a million advertisers or so on the Web. I expect to have several million advertisers. Second, many large advertisers are spending very little on search, but consumer packaged goods companies, pharmaceuticals and auto companies, are beginning to realize that search is more than just a tool to find a product or a Web site. Search has become a medium. It's something people spend time on.
Right now, search advertising represents only about 2% of total ad budgets. It's a fairly small amount right now. I expect that to reach 5% or so by about 2010.
What would it take for Yahoo or Microsoft's MSN to win market share from Google? Are there other, smaller rivals that could threaten Google's dominance?
It's very difficult for me to imagine a scenario where an existing competitor can gain market share from Google, unless Google stumbles. In other words, when you build a strong brand like this and have top notch technology to support it, it's not easy for anyone to take away your brand. You have to lose it.
The area where Google will be vulnerable is in new areas of vertical search, like video.
By offering so many products for free and relying heavily on ad revenue, doesn't Google have all its eggs in one basket?
What is helping Google, maybe by accident, is that people aren't consuming media in the same way that they used to in the last 25 years. …It used to be that we would all sit down and watch CBS News with Walter Cronkite, and it would be very easy for a brand manager to reach us. People are consuming content in different ways. One large bucket of that is the way they use search. That trend is helping Google. …Even Microsoft is talking about, instead of charging for software, using advertising. [Google is] aligned with a much broader trend in the market. I can see down the road that it might charge for some of its services, but that's really out there.
Google has tried to downplay rumors that it will unveil a low-budget PC of its own. What kinds of new technologies do you see Google pursuing in coming months and maybe unveiling at the Consumer Electronics Show this week?
The PC thing didn't make sense to me, because that is a pretty low-margin business and it does not by itself address a big problem for a large group of people. That's typically what Google goes after. What is a problem is connectivity: Once you buy the PC, can you get it hooked up to the Internet and get it going? If Google comes up with something, it could be something that addresses the ease of connecting your various devices, which is where the rumors of this Google Cube have come from: A device that allows you to very quickly and without any settings connect to the Internet or connect to various devices.
I think access is still an area Google will go after. In reality, the biggest problem we have right now is that we don't have universal access to broadband. The real opportunity is to have always-on and anywhere-on. No one is really looking at this. That kind of connectivity requires massive investment, a long-term vision, and that's the kind of thing I can see Google working on. Not only would it solve a big problem, but it would also increase Internet usage massively.
So what happens if Google hits $600 within the year? Will you downgrade the company, or lift your price target again?
That depends on several things. Google stock is pretty volatile. If it reaches $600 in intraday [trading] or for a few days, I don't intend to change my price target. If our [financial] estimates aren't changing materially, yes, that is a time that we would downgrade. If there are major changes to our outlook, we would look at potentially changing [to] our target. We're basically saying: If things don't change in a significant way and by the end of our year Google has reached our price target, it has achieved its valuation.
Wow. Seems to be quite speculative (all forecasting is afterall). It's interesting to note that his firm is the investment banker for Google. Take that relationship seriously, as analysts these days are paid by how well the investment banking side does (odd sort of compensation, but one that drives more companies to that particular firm for IPOs or stock sales).
Another thing I'm skeptical of are his long-term predictions about the use of advertising. Essentially what he is saying is that Google will be reliant on advertisers for all of their revenue. What if a study is released tomorrow that shows that the ads aren't producing expected results (sales)? Google could become decimated.
I don't usually click on Google ads and I don't many who do (Agent Disco is the exception). I wonder just how profitable this sort of business model actually is.
One last thing I have concerns about is Google's lack of transparency as far as reporting their results (and how much revenue the ads actually generate for their clients). This type of thing could get Google into a lot of trouble.
Then again, had I bought Google after the IPO at around $100, I would be pretty happy right now.
I very rarely click on their ads, actually. But I do click on the occasional "odd fact" or "funny quote" that shows up at the top of my Gmail inbox.
I agree with you - seems this analyst, who has a vested interest in Google doing well, has dot-com era glasses on through which he only sees an incredibly optimistic future for Google. Of course he can justify his price target.
3 comments:
How high can Google Inc.'s shares go?
The search giant's shares have more than quintupled since the company's initial public offering in August 2004 and finished Wednesday at $445.24. Of 36 analysts surveyed by Thomson First Call, 26 have a "buy" or "strong buy" rating on its shares, while just one recommends selling.
Analysts have been one-upping each other with ever-higher price targets, and this week Piper Jaffray & Co. Internet analyst Safa Rashtchy made headlines with a new $600 target for Google. That's up from his earlier 12-month price target of $445, issued in October.
His new $600 target would put Google shares at a whopping 68 times his projected 2006 pro-forma earnings of $8.82 a share. Mr. Rashtchy cites a somewhat more palatable multiple of 50 times earnings in his report by arguing investors should buy based on his new estimate for 2007 pro-forma earnings of $11.91 a share. Regardless, he says Google is an "iconic" company that warrants a lofty multiple. He talked to the Online Journal about his expectations for the company, and the risks Google faces.
(Mr. Rashtchy doesn't own shares of Google, but Piper Jaffray counts Google as an investment-banking client and makes a market in Google shares.)
You're one of the most bullish Google analysts out there. How do you defend this price target?
We really put Google in the league of companies like Microsoft or eBay: companies that created new markets, became the dominant players and provided several years of continued growth. These companies have traded well above 50 times [earnings estimates] in their peak years. …Search is continuing to grow, and Google is continuing to gain market share. We didn't expect them to gain share in 2005 and yet they gained 5%. That gives us confidence. By the way, I fully expect to increase our [earnings estimates] for 2007, so that the actual multiple could end up being in the 40s rather than in the 50s.
Why compare Google to eBay or Microsoft rather than, say, Yahoo?
A lot of the value Google has, in my book, has to do with its brand. Only companies such as eBay and Microsoft created that kind of brand awareness. Yahoo has been a great media company, but it hasn't created the same type of following that Google has. More than that, it is really paradigm-shifting companies that can deserve this kind of multiple and can have a great following among investors. Microsoft was really the only platform for computing for many years. EBay suddenly created an efficiency in the market that didn't exist before. Google, in the same way, has created a huge, multibillion dollar business that didn't really exist before and created a massive following.
Since initiating coverage of Google in April 2005, you've maintained an "outperform" rating and bumped up your one-year price target five times. Until now, the increase has been pretty incremental. So why the jump this time?
I felt that we were always trying to catch up with Google in terms of fundamentals and stock price because we were always very conservative with our estimates. Perhaps there was good reason to be more cautious as Google was just a young public company, and it didn't have as much of a track record of performance. Now, I feel that given what Google has [accomplished], I have a lot more confidence to be more realistic on our estimates, so that I don't have to do it every quarter. I'm not trying to be heroic or controversial or come up with a huge price target. I really felt that we don't really serve investors if I'm reactive. I like to look ahead.
You've covered the Internet industry through the bubble, the bust, and the recovery. Has your experience made you at all wary to attach high price targets to Internet companies?
I certainly had concerns about how our price target would be viewed, especially as Google had decided not to split the stock. …I don't want to be seen as hyping the market. Then again, when people look at the comparison with the dot-com bubble, at that time, we were talking about three to four times the valuations [we are today]. Most people would come up with "creative" new ways to justify valuation, like the value of an eyeball or a unique visitor. The main difference is that I can confidently go to investors and say this is the right price, because I can show them that this is within the historical range. That was never the case in the dot-com bubble.
Google publicly discloses very little information about itself. How does that affect your ratings?
I don't find it particularly difficult because of a couple of reasons. I've known Google nearly since it started. And also I've covered the search industry longer than other analysts. Google is so big that I liken it to Wal-Mart. If you know the retail market, you have a pretty good chance of knowing how Wal-Mart is doing. I study the broader search market. In reality, Google has a very easy business model. It's basically how many searches they have done times how much revenue they get per search.
Having said that, Google discloses very little. It poses some difficulty for analysts, but it really poses more risk for investors. Right now, it is a boom time for Google, and people aren't that worried about a lack of transparency. Should there be any slip or any miss from expectations, investors could be very concerned and there could be some selloff because investors wouldn't know what caused it. So, yes, it is a factor.
Do you think Google is a suitable investment for all investors? Haven't those who have yet to purchase the stock missed out on the lion's share of the gains?
I think that Google is a suitable investment for aggressive investors as well as for long-term investors. Look, our sector is pretty volatile, so it certainly isn't suitable for people who can't handle volatility in the near term. But I think Google is a solid company. If I could buy the stock, I would buy it for my son's college fund.
What would you recommend to those who bought Google more than a year ago when you initiated coverage? Should those investors take some profits or continue to wait it out?
I would continue to hold the stock. Obviously, it depends on each investor's liquidity needs, and I can see the urge to at least take some profit off, but given the outlook we see for the company for [2006] and beyond, I think they would be leaving some money on the table if they took profits now.
You've estimated 2006 revenue of $6.4 billion, up from $4 billion in 2005. Which new business lines do you see contributing significantly to Google's revenue this year, or do you simply expect online ad revenue to grow?
That's the interesting part. We really don't have any new revenue items in there in addition to the core search advertising revenue. We haven't really modeled anything else. Given that search revenue is so big, the additional revenue will take a while to contribute. You just can't move the needle that easily. But by the end of this year, we expect revenue from Google Base [classifieds] and Google's advertising network to become more meaningful.
Of all the new products Google has rolled out in recent months, which do you see as the most significant?
[Some that] have already built a good Google following and have helped Google even though they don't generate revenue are Google Mail and Google Maps. Those two products have become enormously successfully in a very short period of time. We see continued adoption of those two products.
In terms of new products that I'm most excited for, Google Base to me is the most exciting one. That could allow Google to create an entirely new source of information beyond what's available on the Web.
What is the single biggest risk to Google's business model? What about to the stock price?
As they get into new areas of content that haven't been mined yet, off-the-Web content or video content, they may not have the advantage that they had in finding and presenting Web content. …Other companies may gain advantage over them.
Related to that, if ever Google takes its eyes off the focus on user satisfaction, that's where they could really lose out to competition. That could potentially happen if there's an increase in advertisements listed on its pages or in other formats. That is not something I see right now for Google, but if the opportunity is too lucrative, it may hurt them.
In terms of the risk to the stock, probably the biggest risk is that, up to now, most analysts have been conservative with their estimates, simply because the growth was so big that we didn't believe it. Of course, everyone came out of the dot-com era, so we were being more conservative. After a while, analysts may become more bullish and could become too aggressive. Given that Google doesn't give guidance, they could miss [analysts'] expectations at some point.
You're estimating that the paid-search industry will grow to more than $33 billion in 2010 from $10 billion in 2005. Where will all that growth come from?
I think that we will have many more advertisers. Right now, globally, we may have half a million advertisers or so on the Web. I expect to have several million advertisers. Second, many large advertisers are spending very little on search, but consumer packaged goods companies, pharmaceuticals and auto companies, are beginning to realize that search is more than just a tool to find a product or a Web site. Search has become a medium. It's something people spend time on.
Right now, search advertising represents only about 2% of total ad budgets. It's a fairly small amount right now. I expect that to reach 5% or so by about 2010.
What would it take for Yahoo or Microsoft's MSN to win market share from Google? Are there other, smaller rivals that could threaten Google's dominance?
It's very difficult for me to imagine a scenario where an existing competitor can gain market share from Google, unless Google stumbles. In other words, when you build a strong brand like this and have top notch technology to support it, it's not easy for anyone to take away your brand. You have to lose it.
The area where Google will be vulnerable is in new areas of vertical search, like video.
By offering so many products for free and relying heavily on ad revenue, doesn't Google have all its eggs in one basket?
What is helping Google, maybe by accident, is that people aren't consuming media in the same way that they used to in the last 25 years. …It used to be that we would all sit down and watch CBS News with Walter Cronkite, and it would be very easy for a brand manager to reach us. People are consuming content in different ways. One large bucket of that is the way they use search. That trend is helping Google. …Even Microsoft is talking about, instead of charging for software, using advertising. [Google is] aligned with a much broader trend in the market. I can see down the road that it might charge for some of its services, but that's really out there.
Google has tried to downplay rumors that it will unveil a low-budget PC of its own. What kinds of new technologies do you see Google pursuing in coming months and maybe unveiling at the Consumer Electronics Show this week?
The PC thing didn't make sense to me, because that is a pretty low-margin business and it does not by itself address a big problem for a large group of people. That's typically what Google goes after. What is a problem is connectivity: Once you buy the PC, can you get it hooked up to the Internet and get it going? If Google comes up with something, it could be something that addresses the ease of connecting your various devices, which is where the rumors of this Google Cube have come from: A device that allows you to very quickly and without any settings connect to the Internet or connect to various devices.
I think access is still an area Google will go after. In reality, the biggest problem we have right now is that we don't have universal access to broadband. The real opportunity is to have always-on and anywhere-on. No one is really looking at this. That kind of connectivity requires massive investment, a long-term vision, and that's the kind of thing I can see Google working on. Not only would it solve a big problem, but it would also increase Internet usage massively.
So what happens if Google hits $600 within the year? Will you downgrade the company, or lift your price target again?
That depends on several things. Google stock is pretty volatile. If it reaches $600 in intraday [trading] or for a few days, I don't intend to change my price target. If our [financial] estimates aren't changing materially, yes, that is a time that we would downgrade. If there are major changes to our outlook, we would look at potentially changing [to] our target. We're basically saying: If things don't change in a significant way and by the end of our year Google has reached our price target, it has achieved its valuation.
Wow. Seems to be quite speculative (all forecasting is afterall). It's interesting to note that his firm is the investment banker for Google. Take that relationship seriously, as analysts these days are paid by how well the investment banking side does (odd sort of compensation, but one that drives more companies to that particular firm for IPOs or stock sales).
Another thing I'm skeptical of are his long-term predictions about the use of advertising. Essentially what he is saying is that Google will be reliant on advertisers for all of their revenue. What if a study is released tomorrow that shows that the ads aren't producing expected results (sales)? Google could become decimated.
I don't usually click on Google ads and I don't many who do (Agent Disco is the exception). I wonder just how profitable this sort of business model actually is.
One last thing I have concerns about is Google's lack of transparency as far as reporting their results (and how much revenue the ads actually generate for their clients). This type of thing could get Google into a lot of trouble.
Then again, had I bought Google after the IPO at around $100, I would be pretty happy right now.
I very rarely click on their ads, actually. But I do click on the occasional "odd fact" or "funny quote" that shows up at the top of my Gmail inbox.
I agree with you - seems this analyst, who has a vested interest in Google doing well, has dot-com era glasses on through which he only sees an incredibly optimistic future for Google. Of course he can justify his price target.
Post a Comment