I’m not somebody who particularly courts controversy. Personally, I think that saying things just to get a rise out of people is a waste of precious time. I suspect I’m going to irritate a few people in the next couple of paragraphs though, and I sincerely apologize in advance.
I just read a quote from Yahoo! news that a certain analyst thinks Google’s stock price is going to hit $500 in 2009. The basis for this estimate is that he thinks Google will ultimately be successful with its push into the mobile phone market. Now I’m not somebody who discounts Google – I think they’re a great company. If you crunch the numbers though, I don’t think that a share price of $500 makes any sense.
Let’s look at a couple of scenarios:
1. The numbers for 2008
In 2008, Google’s net earnings (i.e. after expenses, but before taxes – what is commonly referred to as EBITDA) were around $5 billion US. This is an estimated number as they haven’t yet released the final numbers for the fourth quarter of 2008. If that holds, then based on their current share price of $325, and 3.15 million outstanding shares, their earnings per share (EPS) is a pinch under $16, and their P/E is around 20.
2. Assume their P/E stays steady and their earnings grows in 2009
Assuming that their P/E continues to hover in the low 20s, in order for their share price to hit $500, their earnings would have to increase to around $7.7 billion USD, an increase of about $2.7 billion – or 54%. That’s a pretty substantial increase in the current economy, even for Google. Their earnings “only” went up 37% from 2006 to 2007. We’ll break these numbers down further in a sec.
3. Assume their income stays steady, and their P/E increases
Assume that Google’s net income holds around where it currently is, their P/E would have to be around 31 in order for their share price to hit $500. That’s pretty high for a tech stock these days. Apple’s P/E is currently around 17 for a comparison.
Don’t Call Me – I’ll Call You!
So let’s say that Scott Kessler is correct, and Google will bring in an additional $2 – 3 billion in revenue in 2009 based primarily on their mobile venture.
Bear in mind that Apple’s iPhone, which accounts for 39% of their 2008 revenue at $4.6 billion is likely to see some slide in sales based on the general economy.
Bear in mind that Apple is going to fight like crazy to hold onto market share – and we’re not even looking at the big boys like Nokia.
Bear in mind that Google’s Android platform is free open source software (FOSS), meaning that they’re giving it away.
The people at Google aren’t stupid, and they’ve put together a consortium of companies that are going to make Android-based phone handsets. I assume that they’ll figure out some revenue streams from that – driving more mobile traffic to their search engine (and hence their ads), or even selling hardware themselves in a pinch.
Given that Google is tightening the belt and laying off temp workers, I don’t think anyone in Mountain View is relying on selling 10 to 15 million handsets in 2009. ($2 billion divided by $200)
My prognostication (not that I’m any good at that!): look for a 10% increase in revenue for Google in 2009, based primarily on eating their competitor’s lunch in online advertising. Share price should go up accordingly.