As Google's share price approaches the $500 mark again, it's fair to wonder how far the stock will rocket. On April 20, the shares (symbol GOOG) gained 2% to close at $482.48. On April 19, the company announced first-quarter profit of $1 billion, up 69% from first quarter of 2006, as revenue grew 63%. But the shares are 6% off their all-time high of $513, achieved last November.
One big Google fan is Legg Mason's Bill Miller, perhaps America's best-known fund manager. "There is no company in the market that we can find with a faster top-line growth rate, a higher profit margin, a dominant position like Google enjoys but with a lower price-earnings multiple," Miller said in an interview with Kiplinger's on April 19. Miller notes that Google has a lower P/E ratio (26, based on the $18.92 per share analysts expect the company to earn in 2008) than Starbucks (SBUX) but is growing twice as fast as the ubiquitous coffee company. He puts it in a league with Wal-Mart (WMT), Microsoft (MSFT), Cisco Systems (CSCO) and Dell Computer (DELL) at the start of their meteoric stock-price ascents. Those companies also sported lofty P/E ratios in their early years, but Miller says the stocks were cheap in relation to the firms' subsequent successes.
Google is the biggest player in online advertising with more than 50% of the market. The company makes nearly all of its money by delivering targeted online ads. When you run Google's search engine, ads are displayed on its Web pages and those of its partners based on the keywords you use in your search. Google's market share in Internet search advertising is more than twice as large as its main rival Yahoo. The company also gets paid for licensing its technology to other companies and has branched out to other online businesses.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The company wants to push its dominance beyond Internet search ads. On April 13, Google announced it plans to buy DoubleClick, which makes advertising-management technology for media buyers and sellers, for $3.1 billion in cash. The deal benefits Google because it will give DoubleClick clients access to Google's more than 500,000 advertisers and allows Google to offer its advertisers better services, says Troy Mastin, an analyst with William Blair & Co. The DoubleClick purchase is expected to close this year and would be the largest acquisition Google has ever done. Mastin describes both Google and DoubleClick as 800-pound gorillas in their respective markets and wonders: "Can there be such a thing as a 1,600-pound gorilla?" He rates the stock an "outperform."
How well Google does in other ventures will determine whether the stock has the juice to produce bigger gains for investors, says Bear Stearns analyst Robert Peck. In addition to the DoubleClick deal, Google has expanded into radio advertising and online video entertainment with its purchase of dMarc Broadcasting and YouTube. "The mere proving of progress in any of these areas would be enough for investors to give some credit," Peck says. He rates the stock an "outperform" and thinks the shares will be worth $600 this year.
Google has done an excellent job of managing Wall Street expectations. Earnings have beaten analyst estimates ten out of 11 times since the company went public in September 2004. A higher than expected tax rate contributed to the company's only earnings miss, in the final quarter of 2005. Thanks to better handling of its finances, the company cut its effective tax rate from 42% then to 26% now.
But early victories may haunt Google. The biggest risk with the company, Mastin says, is that "it will never be able to replicate the success of its search business in any additional forms of advertising or mediums." Plus, large numbers work against the stock. The high share price makes dollar movements seem impressive, although they're not when viewed on a percentage basis. And the bigger the Mountain View, Cal., company gets, the harder it becomes to post revenue and earnings gains that wow investors.
-
Stocks Chop as the Unemployment Rate Jumps: Stock Market TodayNovember job growth was stronger than expected, but sharp losses in October and a rising unemployment rate are worrying market participants.
-
Should You Renew Your CD?With rate cuts impacting earnings, we examine if now is a wise time to renew CDs.
-
7 Ways to Plan Now to Save on Medicare IRMAA Surcharges LaterUnderstand the critical two-year lookback period and why aggressive planning before you enroll in Medicare is the most effective way to minimize IRMAA.
-
If You'd Put $1,000 Into Coca-Cola Stock 20 Years Ago, Here's What You'd Have TodayEven with its reliable dividend growth and generous stock buybacks, Coca-Cola has underperformed the broad market in the long term.
-
If You Put $1,000 into Qualcomm Stock 20 Years Ago, Here's What You Would Have TodayQualcomm stock has been a big disappointment for truly long-term investors.
-
If You'd Put $1,000 Into Home Depot Stock 20 Years Ago, Here's What You'd Have TodayHome Depot stock has been a buy-and-hold banger for truly long-term investors.
-
What the Rich Know About Investing That You Don'tPeople like Warren Buffett become people like Warren Buffett by following basic rules and being disciplined. Here's how to accumulate real wealth.
-
If You'd Put $1,000 Into Bank of America Stock 20 Years Ago, Here's What You'd Have TodayBank of America stock has been a massive buy-and-hold bust.
-
If You'd Put $1,000 Into Oracle Stock 20 Years Ago, Here's What You'd Have TodayORCL Oracle stock has been an outstanding buy-and-hold bet for decades.
-
How to Invest for Rising Data Integrity RiskAmid a broad assault on venerable institutions, President Trump has targeted agencies responsible for data critical to markets. How should investors respond?
-
If You'd Put $1,000 Into Sherwin-Williams Stock 20 Years Ago, Here's What You'd Have TodaySherwin-Williams stock has clobbered the broader market by a wide margin for a long time.
