Google: $600 or bust?

NEWS ANALYSIS

By Ben Elgin

updated 1:33 p.m. ET Jan. 4, 2006

After a year that saw its stock more than double to surpass $400, Google kicked off 2006 in similar gravity-defying fashion. Investment bank Piper Jaffray & Co. predicted in a Jan. 3 research note that the search kingpin's stock would climb to $600 before yearend. The sanguine call mobilized Google's boosters, elevating the shares 5%, to $434, by the close of trading Tuesday.

But hold on a minute. Google at $600? A year ago, it hovered below $200. Just six months ago, BusinessWeek Online contemplated the plausibility of Google topping $300. Sure, our verdict was cautiously upbeat, and the company has since outperformed even the rosiest of expectations. But at what point does Google's stock price go from rich to outlandish?

'Reasonably priced'
Given the amount of risk associated with Google's business, it appears to be approaching this run-and-hide territory today, let alone at $600. Despite its glowing successes, Google still gets almost all of its business from a single source of revenue -- one that's maturing and slowing in growth.

In addition, Google faces deep-pocketed competitors that will likely figure out how to mount a more successful challenge to Google's search stronghold and at least slow its advance across the globe.

"The stock is reasonably priced right now," says Scott H. Kessler, an equity analyst at Standard & Poor's, which has a $428 target price on it. "A lot of people aren't cognizant of the many risks and negatives related to Google."

'Good as it gets'
To be fair, it's pretty easy to miss the negatives. Google vaulted to more than $6 billion in gross sales last year, according to analyst estimates. In a blink, it has entrenched itself as the biggest player in the online ad market worldwide.

MORE FROM BUSINESSWEEK ONLINE A first look at Google Books Employment 2006, statistical snapshot 2005’s worst predictions A few tech predictions for 2006 10 deals 2006 may bring Craigslist may be blocking search engines Google at $600? Welcome back, Henry—Er, I mean Safa Stocks: Breakdown dead ahead

Despite this newfound girth, Google's anticipated growth rate is more than double that of other Internet highfliers, such as Yahoo! and eBay, according to Pacific Growth Equities analyst Derek Brown. "As a framework, it's about as good as it gets," says Brown, who doesn't offer a price target on Google.

Granted, all of that may help explain Google's stratospheric position today. But a $600 price tag would make Google the 10th-richest U.S. corporation by market cap -- ahead of giants Intel and Procter & Gamble and right behind the likes of Pfizer and Wal-Mart. That's heady company for an outfit that recently turned seven years old.

MORE FROM BUSINESSWEEK

BusinessWeek Section Front

Stocks Sink on Dubai Debt Worries IBM vs. SAS: The Battle over Data Analysis Software Picks of the Week: Microsoft, H-P, Goldman, TiVo Stock Picks: Microsoft, TiVo, J.Crew Stocks Gain on Recovery Optimism Central Bank Buying Spurs a Gold Rush Experts Talk About FOMC Minutes, GDP, and Home Prices Stock Picks: Hewlett-Packard, Analog Devices Stocks Fall on Economic Data Checking the Health of the Housing Recovery BusinessWeek Section Front