Google's Next Stop: $800 a Share?

By Dan Gallagher

SAN FRANCISCO (Dow Jones) -- The fact that nearly all analysts covering Google Inc. already rate the stock as a buy has not dissuaded them from showing their love for the Web search giant following its latest earnings report.

In this case, Wall Street responded to the report by pumping up its price targets on Google (GOOG) -- some of which put the stock north of the $800 mark. This implies an upside of more than 20% for a stock that has already surged by 50% in the past 12 months.

Late Thursday, Google reported a sharp jump in earnings for the third quarter amid continued strong demand for its ad services. Earnings grew despite rising expenses stemming from a continued hiring spree.

The news gave another boost to the stock, putting the shares above the $650 mark for the first time to set a new all-time high.

Sentiment on Wall Street is already highly bullish on Google. Out of 37 analysts covering the stock, 34 rate the stock as a buy with only three carrying neutral ratings, according to Thomson Financial. There are no sell calls on Google at present.

Cheered by the earnings results, at least 16 analysts raised their price targets on Google. The changes moved Street median target price from $657.50 to $722.50.

At least four brokers have established price targets at or above the $800 mark, with the highest coming in at $850, according to Thomson data.

Still a cheap valuation?

At $800, Google would be trading at nearly 40 times the Street's average earnings estimate for 2008. That's actually a cheaper valuation than rival Yahoo Inc. (YHOO) , which trades about 55 times next year's expected earnings.

"We believe that, given the expanding opportunities, there is potential for higher estimates and multiple expansion, and that this price target may prove conservative," wrote Steve Weinstein of Pacific Crest, who pushed his target price from $600 to $850.

In a report to clients, Weinstein noted that his target represents a multiple of only 30 times his earnings estimate for 2009, "which we consider reasonable given Google's strong growth, the potential upside from the pending DoubleClick acquisition and the mobile opportunity."

Rob Sanderson of American Technology Research bumped his target to $815 from $685, saying the company is "strategically positioned so far ahead of competitors that it can comfortably slow expansion and still outpace others."

Sanderson said his new target represents a multiple of 35 times the average of his earnings estimates for the 2008 and 2009 fiscal years.

"We believe that 12-months from now, Google can achieve a 30x multiple on 2009, which would imply an $865 stock in one year," he added.

Heath Terry at Credit Suisse pushed his target price to $800 from $600.

"While the stock has had a strong run in recent weeks we believe further upside is likely near term and certain long term as investors come to better appreciate the long term opportunity for Google in search and beyond, something that isn't reflected in the stock at 30x '08 pro-forma EPS," Terry wrote in a note Friday.

Calls for a split

While it has encouraged many analysts to steadily bump targets higher, Google's blistering stock surge has also spurred at least one call for a split.

Needham & Co. analyst Mark May released a note to clients Tuesday advising that the Internet company undertake a stock split, in order to make its shares more accessible to small investors.

That way, May reasoned, Google could pull in less fickle shareholders aiming to hang on for the long haul, thus reducing volatility in the share price. Currently, May wrote, roughly 84% of Google's outstanding shares are owned by institutions, whereas comparable companies have an average institutional ownership of only 67% of shares.

But any concerns about pricing out certain investors haven't stopped the bullish notes from coming.

Leland Westerfield of BMO Capital Markets -- one of the few on Wall Street to have a neutral rating on the stock -- lifted his own price target to $690 but remained cautious on the shares.

He said an $800 price for Google shares could be justified, but "one or two of these events needs to develop favorably, soon: a) the DoubleClick merger brings an advantageous and unduplicable network-effect to Google intelligence, b) the upcoming 700Mhz broadband wireless auction is restructured more in favor of net-neutrality, or c) internet video ad serving develops materially."

(END) Dow Jones Newswires

10-19-07 1537ET

Copyright (c) 2007 Dow Jones & Company, Inc.

Original source: http://www.smartmoney.com/bn/ON/index.cfm?story=ON-20071019-000775-1537