One On One With Steve Weinstein, Internet Analyst at Pacific Crest Securities
Tuesday, November 21, 2006
|
|
|
|
SUSIE GHARIB: Investors went "ga-ga" for Google today. Stock of the online search engine passed a major milestone today, the $500 a share mark, closing at $509.65, up $14.60, Google now has a market cap larger than giants like Coca- Cola, American Express or Merck. And it is the newest member of a very select list of U.S. companies: one of seven whose shares trade above $500 each. Today's stock move was powered by a belief that Google will find new ways to rake in more online advertising revenue. Joining us now to talk about the outlook for Google, Steve Weinstein, Internet analyst at Pacific Crest Securities. Hi, Steve.
STEVE WEINSTEIN, INTERNET ANALYST, PACIFIC CREST SECURITIES: Hi.
GHARIB: Well, do you think it makes sense to buy Google at $500 a share?
WEINSTEIN: We actually still think there's a lot of opportunity for the stock to go higher. We're getting close to the end of the year. We're set to roll out our 2008 numbers and use that as the basis for valuation. Given the growth in this company and the leverage that there is in the model, I think you're talking about a company that could earn close to $20 a share in 2008. So a 30 multiple on that would imply a stock price about $600 12 months out, (INAUDIBLE) 20 percent upside.
GHARIB: Do you think a 30 plus multiple is justified for Google?
WEINSTEIN: I think easily. When you look at the growth in the company, I mean that's about half its current growth rate. So here you have the biggest company in the space going faster than all of its competitors with better margins than everyone else. I think that's a conservative multiple to put on the earnings.
GHARIB: We've seen Google stock go up 21 percent so far this year. And if you look since it went public in 2004, the stock is up something like 400 percent. What's driving all this growth?
WEINSTEIN: I think early on no one really understood how much potential there would be for a surge. Everyone was talking about the law of large numbers and we didn't really understand the business that well. And then Google came out and executed and I think they opened up everyone's eyes to how much you can really drive that business and how innovative you could get with search. And I think that was that early surge in the stock as people just trying to understand the potential in this business. Now what you're seeing though is just their ability to maintain high growth. You know the fact that they have such a leadership position, such a dominant position, you're starting to see more and more companies want to partner with them. So whether it be the Youtube acquisition or a partner with Myspace, you're seeing all the growth engines of the Internet come under Google's monetization engine. So the advantages seem to be sustainable here.
GHARIB: Well, not that you bring up Youtube, there were a lot of people who thought that the price that Google paid for Youtube, $1.2 billion was way too high. Do you think now given the way that we've seen the stock growing that that's the proof that it was justified?
WEINSTEIN: Youtube still is new and they just acquired it. So we'll see how it pencils out. But I definitely think you can make a case though that they didn't overpay for it. I think if you look at the trajectory in growth in Youtube, it certainly looks to be on the same sort of path as a Myspace. They were willing to commit $900 million to line up that distribution. So actually own that property versus having to partner for the traffic. I think you can make the case that they got a good deal, assuming that it can continue on its current growth trend.
GHARIB: What the risks for Google? What could bring it down? There's always a down side.
WEINSTEIN: Yeah. You know, the company is trying to push into some new areas, some new types of ad formats whether it be online or offline, new businesses such as a payment business they've launched. Those are new for the company. It's hard to say how well they'll execute against those. Those are things to worry about that maybe the potentials aren't there like we think it is. I think if you look back, this management team has a very good track record of execution and staying focused. And I think you have to give them the benefit of the doubt. Plus you have a backstop, their core business is doing so well.
GHARIB: OK. You had a $500 price target on Google's stock. It's passed that. What's your next new price target?
WEINSTEIN: It's like I said in the beginning here, you know, I think as we roll out our '08 numbers, we're going to be talking something close to $20 a share in earnings. Probably think the next logical step somewhere around $600.
GHARIB: Since Google went public, the company said that it was not going to split its stock. Do you think that the company is going to stick with those plans?
WEINSTEIN: You know it's hard to say. They're big fans of Warren Buffet and that's one of his mantras. So at this point, no reason to think that they will.
GHARIB: All right, Steve, for disclosure purposes. do you own the stock?
WEINSTEIN: No, I do not.
GHARIB: All right. Thank you so much for coming on the program. Appreciate it.
WEINSTEIN: Thank you.
GHARIB: We've been speaking with Steve Weinstein, Internet analyst at Pacific Crest Securities.
