[FoRK] "If Google is valued at $30-plus billion, it has massive upside baked into the stock."

Joseph S. Barrera III joe at barrera.org
Tue May 4 08:08:29 PDT 2004



SAN FRANCISCO (CBS.MW) - If we've learned one thing from the boom and
bust years, it's that an IPO event doesn't make a company.

"You don't want a one-day celebration that turns into a multi-year
hangover," as hedge fund manager Peter Thiel puts it.

But based on the media attention the Google IPO is receiving and the
valuations of $35 billion being bandied about, one would think the
five-year-old start-up was all grown up, or that a future of hyper
growth was set in stone.

If someone landed from another planet and looked at valuations, he'd
surely say, Internet media rules.

If Google goes out at $35 billion, together with Yahoo's (YHOO) $35
billion valuation, the two companies would practically equal Time
Warner's (TWX) $78.5 billion market valuation. Time Warner is expected
to grow sales to $41 billion this year, about 10 times as much as Google
and Yahoo combined.

Google alone would be closing in on Walt Disney's (DIS) $47 billion
valuation and would stand at more than half of Viacom's  (VIA) $67.4
billion value.

If history repeats itself, maybe Google will buy Viacom, Yahoo will buy
Disney and some starry-eyed analysts will begin slapping $400 price
targets on both Google's post-IPO shares and Yahoo's.

Yep. We've seen it before. Remember when Amazon.com (AMZN) got the
infamous $400 price target back in 1998, or when Yahoo received a $600
price target back in January 2000?

Or, recall when AOL scooped up Time Warner just when AOL hit its peak

Remember the last memorable Yahoo cover in the Fortune June 1999
edition? On the cover was Tim Koogle, former lead Yahooligan, with a
headline that read: "Net Stock Rules. Those Wild Internet valuations
change the whole game."

Well, we all know what happened after that. Most of us went on
sabbaticals, and some hid deep inside caves.


So lest we party too much on the first day because we think it's
inevitable that these companies will change the world, let's consider
what's being assumed before we start bidding up shares.

If Google comes out at $35 billion, don't think it's a screaming "buy."

For that price, an investor would have to assume pretty aggressive
numbers going out into the future. An investor would have to assume that
Google won't see competition from, oh, Microsoft's (MSFT) MSN, media and
commerce companies.

In short, to support $35 billion, one would have to assume a
picture-perfect world. (Oh, who says we're asking for too much?)

In this world, one would have to assume that Google doubles sales this
year, and maintains that fast clip over the next several years (assume
sales grow 90 percent in '05, 80 percent in '06, and so on until by year
five, or 2008, when Google sales grows by 50 percent). One would have to
assume that net margins stay at 30 percent indefinitely and, say, a
discount rate of 16 percent.

Using those very high hurdles and starting with $961 million in sales
from last year, then maybe Google would deserve a $30-plus billion

Looked at another way, if Google grows its cash flow by 30 percent each
year over the next five years, it may generate $5.2 billion by 2010.

That's assuming it generates $1.4 billion in cash flow by next year. If
we apply a traditional media multiple of roughly 10 times forward cash
flow estimates, then Google would be worth about $50 billion in 2009.

Since that's about 5 years from today, that means a $35 billion
valuation would return a meager 7 percent compounded annual return.

If Google is valued at $30-plus billion, it has massive upside baked
into the stock. And, even if it grows cash flow at an unusually fast
rate of 30 percent annually over the next five years, you'd earn only 7
percent on your investment each year.

See: Search engine timeline. Will Google dominate search in 2005?

See: Google says it's giving away revenue.

See: A googol of a Google IPO.

Now here's a positive look at Google's valuation from Jordan Rohan, an
analyst at SoundView Technology Group. Google's cash flow is dependent
on its international growth. If it can tap the international market,
then Google can grow its cash flow by 30 percent annually over the next
five years is achievable.

Sound off: Would you buy Google if it was worth $35 billion,
or would you short it? E-mail: Bfrancisco at marketwatch.com.

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