Archive for February, 2006

The other night I woke up in a cold sweat about my last post.
 
No, nothing about the actual skiing… but my GOOG numbers.
 
My conclusion is right… but my calculation is embarrassingly — boneheadedly? — incorrect.
 
GOOG quarterly comparison year-to-year may "slow" to 50%… and 33%… and 25%… but that’s not the measure I should have used below… rather, I should have used quarter-to-quarter growth rate.
 
It’s tough to figure out what rate to use, they’ve been all across the board for the last two years:  8%, 15%, 28%, 22%, 10%, 14%, and 22% for the most recent q-to-q.
 
So, to be conservative, let’s pick 10% q-to-q growth rate for 2006 (which kinda equals 50% growth per year), 7.5% for 2007 (about 30% growth), and 5% for 2008 (about 20% growth), here’s what the revenue analysis should have looked like:
 
   Q4 05     $1.9b (actual)
   Q1 06     $2.1b (projected)
   Q2 06     $2.3b
   Q3 06     $2.6b
   Q4 06     $2.8b
   Q1 07     $3.0b
   Q2 07     $3.2b
   Q3 07     $3.5b
   Q4 07     $3.8b
   Q1 08     $3.9b
   Q2 08     $4.1b
   Q3 08     $4.3b
   Q4 08     $4.6b x 4 quarters equals about $20 billion run rate
  
 
So, my main statement — that Google will be a $20 billion company before anyone knows it — was correct… but it won’t be in less than two years, rather, about three years… or faster if q-to-q growth is greater than 10%/7.5%/5%.
 
This calibrates with another simple observation I’ve made: 
 
If total advertising per year is $400-$600 billion (Ad:Tech stat), and online takes a 10-15% portion of that by the end of the decade (or faster), then online will represent $40-$90 billion in revs.
 
If GOOG share slips from 40%+ to say a third, then GOOG will still be a $13-$30 billion company by the end of the decade (or faster).
 
So, my 24-month price target stays the same:  $160 billion market cap ($20 x 8 multiple) divided into number of shares available, which keeps changing as more shares come on to the market.  At current share levels, though, this suggests a 24-month price target of $541.30.  Give or take.
 
Sorry for any confusion here!
 
P.S.  Disclaimer:  I am just using simple math.  We all know life isn’t always so simple.  <g><groan>  Appreciate any and all comments!
My wife and I took our daughter skiing for the first time yesterday.  Absolutely adorable! <says the very biased dad>  Was also my wife’s birthday so we had a wonderful family outing all the way around.
 
Even when all of Google showed up to ski!
 
Unbeknownst to us, our quick trip coincided with Google’s annual ski trip — yes, the entire company goes skiing — albeit in three "shifts" since there aren’t enough accommodations at Squaw Valley to handle the entire company at once these days.
 
I, of course, engaged as many folks as I could.  Here’s what I learned:
 
(1)  Everyone at Google snowboards.
 
(2)  Like all youth, Google employees remain — despite the earnings announcement — supremely confident.  (Ah, remember when we were invincible?  Hey, wait a minute, I still feel that way! <smile>)
 
(3)  Unlike other youth, Google employees have a sense of maturity and purpose… and a clear mission to change the status quo.
 
(4)  GOOG didn’t miss it’s numbers… well, at least using, uhm, fuzzy logic.  I haven’t been through all the reports yet, but according to a couple employees, if you factor in one-time charges (like establishing a $90 million charitable fund) and adjust for a bonehead tax rate goof, earnings would have been in the "$1.80’s".  (Even more amazing than GOOG actually beating its numbers is the fact that the rank & file employees know these details… stock stuff must be widely and intensely discussed by the watercooler, er, I mean Odwalla Juice fridge.)
 
 
My take?
 
Same as always.
 
Google will be a $20 billion company before anyone knows it… and, at about the same price/sales ratio as MSFT, that means GOOG should have a market cap of about $160 billion.
 
The $160 billion question, then:  When?
 
This quarter, Google’s revenue was almost $2 billion, about 86% growth… or an $8 billion run rate.
 
Let’s say GOOG rev slows to 50% next quarter.  That’s $3 billion next quarter… or a $12 billion run rate.
 
And let’s say GOOG rev slows to 33% the following quarter.  That’s $4 billion… or a $16 billion run rate.
 
And let’s say GOOG rev slows to 25% that very next quarter.  That’s $5 billion… or a $20 billion run rate.
 
What this suggests is that Google will be a $20 billion company well before the end of the decade… like in less than two years.
 
What’s my 24-month price target?  (Hey, everyone else gets to play GOOG lottery!):  $160 billion market cap divided into number of shares available, which keeps changing as more shares come on to the market.  At current share levels, though, this suggests a 24-month price target of $541.30.  Give or take.
 
[Royal Note:  This conclusion is correct but the calculation is — embarrassingly — incorrect.  See Feb 9th post for correct calculation.]
 

So, why the panic in the stock price yesterday?

 
Easy:  Dejection.  ("They missed!")  Confusion.  ("Did they miss?!")  Emotion.  ("Yes!  No!  Which one?!  Oh, shit!") 
 
Those things, plus the fact that shares really have gotten ahead of themselves. 
 
In truth, yesterday was a much needed event… a weird detente of sorts between warring factions.  Everyone got something: 
 
     Those rooting against the stock saw the significant drop they’ve wanted.
 
     Those rooting for the stock saw significant support in the face of an emotional sell-off for what can only be described — despite all rhetoric — as an outstanding quarter.
 
P.S.  By the way, I think GOOG’s performance means great things for both MSN and Yahoo, too.  We really are witnessing a total revolution — a coup d’ tate — of traditional media.  MSN and Yahoo are next in line to benefit.