Inside Wall Street: The Case for Google Galloping to $1,200 a Share


Can Google's share price double from here? That's not a moon-shot fantasy, nor a ridiculous assumption. In fact, on more than a couple of metrics, some investment pros view the stock as intrinsically inexpensive. Currently trading at $618 a share, which admittedly many skeptics regard as pricey, Google (GOOG) has demonstrated an agility and creativity to excel in innovative products, resulting in an escalating stock price.

At its peak in 2007, Google rocketed to as high as $742 a share from its IPO price of $85 on Aug. 19, 2004. Will the stock ever streak back to that lofty level, or was that the peak? It can keep climbing, according to some investors who have been buying even though its current price of $618 is already near its 52-week high of $642.96 reached on Jan.18.

Over the next 12 to 18 months, Google should bolt to a new high of $1,200 a share, assert Philip D. Tasho, CEO and chief investment officer at Tamro Capital Partners, and Timothy A. Holland, a principal and co-portfolio manager at that institutional management firm, which shepherds some $1.4 billion. "We view Google as the best balance of value and growth in the large-cap technology sector," says Tasho.

An Energizing CEO

How does Tasho arrive at a price forecast of $1,200? He uses a price-to-revenue ratio, rather than just price-to-earnings multiple, as a measure of Google's value and growth indicator. By this measure, Tasho figures that Google is way undervalued. The stock currently trades at a price-to-revenue ratio of 6.7 vs. its historical multiple of 12. At its peak, Google's p-r ratio was 25. Tasho believes the ratio will jump back up to at least 15, which he estimates would translate to a $1,200 price.

Tasho says the naming of Google co-founder Larry Page as CEO (replacing Eric Schmidt, who remains chairman) is a big positive for the company. He expects Page to "inculcate new passion and spark new energy into the company's competitiveness, and sharpen Google's focus on innovation and new technology to further enhance Google's leadership."

In terms of revenues, Google's growth has been phenomenal, rising from $6.1 billion in 2005 to $21.99 billion in 2010. Earnings have also been robust, leaping from $5.20 a share in 2005 to $29.61 in 2010. For 2011, Standard & Poor's analyst Scott H. Kessler forecasts revenues will rise 15%, benefiting from "more spending on Internet advertising, the appeal of search ads, the company's expansion overseas and increasing traction for display and mobile advertising."

Google's business model has been resilient, he adds. "We are constructive on Google's efforts to broaden its offerings, especially with Web applications and mobile services," says Kessler. His 12-month price target is $750 a share.

Android Leapfrogs Apple

By now everybody knows that Google, the world's largest Internet company, is the generic word for finding almost anything on the Web, offering targeted search from billions of Web pages. Its YouTube video unit, acquired in 2006, is the most popular social media outlet of its kind, attracting 2 billion views worldwide, according to Google.

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And its Android smartphone operating system, launched in late 2007, has also caught fire. According to tech consulting firm Gartner, in third-quarter 2010 Android was the fastest-growing operating system in the globe. And tech research firm Comscoref says Android surpassed Apple's (AAPL) iOS in smartphone operating system market share in the U.S. during the same period.

The Android mobile software shows that "Google is a true innovator, with a number of projects in its 'incubator' that could provide huge potential for future revenues," says Tamro Capital's Tasho. Most of the company's upcoming products revolve around mobility and cloud computing, he adds. Some new tablet computers competing with Apple's iPad use Google's Android operating system, including Samsung's Galaxy Tab.

Google has also developed a product called Honeycomb as the next generation of Android for tablets. It's designed with new features, including a 3D user interface and videoconferencing.

$33 a Share in Earnings for 2011?

Wall Street has turned bullish once again on the stock, which most analysts spurned in 2008 when it tumbled to $247 a share. Of the 45 analysts who follow Google, 38 recommend buying the stock and expect it to exceed its old high. Not one advocates selling, while eight analysts rate the stock a hold.

"We believe Google should continue to see strong double-digit growth for the next few years, driven by international [operations], display [ads] and mobile, as well as continued technology improvements," says Mayuresh Masurekar, analyst at securities firm Kaufman Brothers. He forecasts Google will earn $33 a share in 2011 on projected revenues of $26.2 billion, and $38.80 a share in 2012 on revenues of $30 billion.

Predictably, some of the largest institutional investors have zoomed in on Google, led by Fidelity Management, which has acquired a 4.66% stake; Capital Research Global Investors, which owns 3.98%; T. Rowe Price Associates, which holds 3.14%; and Vanguard Group, with 2.88%.

Tech stocks are bound to remain the leaders as the market continues its robust advance. Investors searching for a mainstay company that's fast-growing and innovative may opt for Google's stock after, well, googling Google.

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