Piper Jaffray on Google: Target Price = $600

We believe the stock will hold its multiple a year from now for the following reasons:
• Given the company’s performance, market share gain, and the pipeline of new
products, we believe outperformance is still very likely;
• We expect the global search market to grow by 41% in 2006 and maintain a
CAGR of 37% over the next five years;
• We expect Google to continue to gain market share in 2006. In 2005, the
company gained an additional 5% market share in the U.S. alone;
• Google’s brand continued to gain strength as the release of new innovative
products such as Google Maps and Gmail enhanced the consumer’s Internet
• Google’s innovations are fueling an impressive pipeline of new initiatives
particularly Google’s Ad Network and Google Base, which should become
notable revenue generators by the end of 2006;
• Expectations for Google most likely remain conservative – we note that we have
raised our forward estimates every quarter of 2005 from our 2006 net revenue
estimate of $4.7B before Google’s Q1 reporting to our current estimate of $8.8B,
an increase of more than 87% since April;
• Despite being the most talked about stock of 2005, GOOG remains significantly
less widely owned than other key technology names and has yet to be added to
the S&P 500.
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 price target
rather than raise it every quarter.
The above factors are leading us to raise our one-year price target to $600, sharply higher than our previous $445 target, but based on fundamentally the same reasoning taken one year further out. Our previous target of $445, which GOOG exceeded briefly in intra-day trading in mid-December, was based on 50x our proforma 2006 EPS estimate. Our new price target, which we feel is attainable by GOOG 12 months from now, is based on 50x our 2007 proforma EPS estimate. Although such a high multiple may seem aggressive, we believe that given Google’s dominant position in an already large yet still rapidly growing market, its phenomenal brand power, and its status as a technology leader justifies such a valuation. Also, importantly, it’s likely 2007 estimates will come up throughout the year, as we have seen this pattern for 2006 estimates play out in 2005. As such, we believe the ending multiple will be well below 50x.
We believe Google is an iconic company that, like Microsoft and eBay before it, has defined a new and vital industry. 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. Currently the other leading Internet companies, Yahoo, eBay, and Amazon trade at an average of 45x 2006 proforma EPS estimates, with Google only slightly higher than average at 47x (and notably below Amazon’s multiple of 52x). We believe that over the next year as Google’s lead in search and online advertising becomes even more apparent and its growth far exceeds its closest comparables (we predict GOOG will grow revenue by 52% in 2006 while YHOO, EBAY, and AMZN will only grow by 27%, 34%, and 19%, respectively), investors, who may be inclined to take some profit now given GOOG’s gains in 2005, will increase their holdings of Google.
Read the full report on Battelle’s site >>

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