Sunday, June 05, 2005
CSFB Pegs Google's Upside at $350 a Share
Credit Suisse First Boston today became the latest broker to raise its price target for Google's shares above the US$300 mark. Shares of the Internet search engine quickly jumped $7.51, or 2.7 percent, to $284.78 after analyst Heath Terry boosted his price target on the stock to $350 from $275. Terry carries an outperform rating on the stock, which closed at an all-time high of $277.27 yesterday.
"While there will certainly be plenty of volatility in the stock price, particularly over what is supposed to be the slower summer period, we believe shares have further to go given the momentum in the company's core advertising business, the growing impact of new business like Gmail, Froogle and Local and a valuation that, relative to the company's growth rate, is far from stretched," Terry wrote in a research note. With his move, Terry joins a growing list of analysts projecting a price of at least $300 for Google.
Think Equity Partners analyst John Tinker expects shares could hit $330 over the next year, while JMP Securities' Bill Morrison has a $310 price target for the shares. And yesterday, Piper Jaffray's Safa Rashtchy moved his price target up to $300. "Google is currently embedding real asset growth of roughly 19 percent over the next five years and cash flow return on investment of approximately 24 percent," CSFB's Terry told clients. "Clearly we believe both the growth rate and the potential cash flow return on investment are likely to prove too conservative."
On a relative valuation basis, Terry noted that Google is trading roughly in line with Net bellwethers Yahoo and eBay, though he argues that Google should trade at a premium to both companies because of its superior growth rate. Based on earnings before interest taxes depreciation and amortization, "we believe Google can grow an average of 45 percent annually over the next three years, while eBay and Yahoo should average roughly 38 percent over the same period," Terry said. For the current quarter, the analyst believes trends in volume and pricing are positive.
Citing query volume data from Nielsen and pricing surveys, Terry believes growth is tracking at roughly 5 percent sequentially versus consensus expectations of about 2 percent. "So while we are cautious about the potential for an eBay-like event down the road as investor expectations rise with the share price, it does not appear to be a near-term risk," Terry concluded.
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"While there will certainly be plenty of volatility in the stock price, particularly over what is supposed to be the slower summer period, we believe shares have further to go given the momentum in the company's core advertising business, the growing impact of new business like Gmail, Froogle and Local and a valuation that, relative to the company's growth rate, is far from stretched," Terry wrote in a research note. With his move, Terry joins a growing list of analysts projecting a price of at least $300 for Google.
Think Equity Partners analyst John Tinker expects shares could hit $330 over the next year, while JMP Securities' Bill Morrison has a $310 price target for the shares. And yesterday, Piper Jaffray's Safa Rashtchy moved his price target up to $300. "Google is currently embedding real asset growth of roughly 19 percent over the next five years and cash flow return on investment of approximately 24 percent," CSFB's Terry told clients. "Clearly we believe both the growth rate and the potential cash flow return on investment are likely to prove too conservative."
On a relative valuation basis, Terry noted that Google is trading roughly in line with Net bellwethers Yahoo and eBay, though he argues that Google should trade at a premium to both companies because of its superior growth rate. Based on earnings before interest taxes depreciation and amortization, "we believe Google can grow an average of 45 percent annually over the next three years, while eBay and Yahoo should average roughly 38 percent over the same period," Terry said. For the current quarter, the analyst believes trends in volume and pricing are positive.
Citing query volume data from Nielsen and pricing surveys, Terry believes growth is tracking at roughly 5 percent sequentially versus consensus expectations of about 2 percent. "So while we are cautious about the potential for an eBay-like event down the road as investor expectations rise with the share price, it does not appear to be a near-term risk," Terry concluded.
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