Original URL: http://www.theregister.co.uk/2006/01/04/google_600_target/

Analyst cheers Google with $600 per share target

'You can do it!'

By Ashlee Vance

Posted in Financial News, 4th January 2006 01:29 GMT

Google and its cavalcade of adoring analysts look set to pump 2006 full of the same unbridled optimism that dominated 2005. Or so we predict after seeing Piper Jaffray analyst, Safa Rashtchy, hike his target on the ad broker up from $445 to $600.

And, why not? The analyst expects "new initiatives, in particular Google's ad network and Google Base, to generate meaningful revenue by the end of '06". Such bright prospects mean Google should maintain its current momentum and reach a new 2007 earnings per share target of $11.91 set by Rashtchy.

Many of you are probably rolling your eyes at this point. After all, it was about six years ago to the day that another financial analyst predicted Yahoo! would hit $600 per share. That never happened, despite Yahoo! sitting at about $500 when the report was issued.

Rashtchy, however, doesn't think he's being irrational. The $600 target is derived from a 50x earnings model that the analyst sees as being consistent with other major technology players.

"We believe Google is an iconic company that, like Microsoft and eBay before it, has defined a new and vital industry," the analyst wrote. "Such market-leading technology companies have traditionally traded with peak valuations in the 50x-60x range. eBay, for example, has traded between 38x and 158x its one-year forward earnings estimate since 2000, with an average forward multiple of 70x. Even excluding the bubble years of pre-2001, eBay had maintained a multiple generally above 55x."

Just in case you're curious, here's the disclosures section of the analyst's report:

Now that's a surprise.

And why did the analyst firm shoot straight for $600 instead of going with a lower estimate such as $480 first? Well, that would have been a major bother.

"While the stock may have its ups and downs throughout the year, we believe it will reach $600 by the end of 2006 and we prefer to have one 12-month target rather than raise it every quarter," Rashtchy wrote.

And surely the analyst must have pointed to the obvious risks - like the already insane amount of hype being heaped upon Google, and the fact that none of its new non-search franchises are all that innovative or unique; and that rivals such as Microsoft and Yahoo! have made Google an even larger target and that Google's search engine results have been watered down by partnerships and blog noise. Yes, the analyst noticed some of this.

"Risks include competition, increasing traffic acquisition costs, loss of key partnerships, slowing search growth and potential for margin declines."

So there you have it. ®