Google Earnings Being Revised Down

We all knew this would happen but right now its playing out the way I thought it might

I read an analyst report on the flight out tonight that suggests the near term price target for $goog is $350, down from $450 because google’s revenues next year are likely to grow in the single digits. They predict 6-7pcnt growth next year down from 15pcnt

But they also believe google will take $500mm out of projected operating costs next year and will still deliver over $10.8bn of ebitda

At 10x EBITDA, an attractive multiple for a franchise like google’s, that’s $108bn of enterprise value. If you add their cash, you get a market value of $130bn which translates to about $400/share.

I am not saying google’s going to $400 any time soon. There’s too much selling still going on. Tax loss selling will certainly be taking a toll on stocks for the remainder of the year

But when investors start looking at places to put money back to work in 2009, I wouldn’t be surprised to see google get some attention

With just one significant revenue stream, its forecasted to generate over $10bn of cash flow

And with services like YouTube, Maps/local, productivity (docs, calendar, mail), and android, none of which have been run like real businesses yet, I think it should get back to $500/share within a couple years assuming no real change in market multiples

I bought the stock aggressively on its way down and made most of my purchases between $320 and $275 and went in with a big slug at $280 around three weeks ago

I think we’ve seen the bottom in google. We may retest it one or more times (which should be buying opptys if it happens), but I don’t think we’ll see the stock go below $200 under any scenario

I also think we’ve seen the bottoms in $aapl and $amzn, two other stocks I’ve been aggressively buying on the way down

Of course time will tell whether we are heading into a ‘lost decade’

With billions going up in vapor every time I open up the paper (tarp, autos, madoff, hedge fund collapses, etc) we are certainly living a much poorer world and its reasonable to expect that stock prices will reflect lower overall amounts of investable capital.

But you’ve got to put money to work if you want to make some of that lost capital back and I think the titans of web tech are one good place to do that starting in early 2009


Comments (Archived):

  1. laptapos

    I hope Google won’t go bankcrupt. If that’s the case, i might lose my earnings too. They have supported me alot. Keep it up!!

  2. CoryS

    Assumes status quo, Fred. Thinking back to the last 2 recessions, some of the then current titans (e.g. MSFT, IBM) came out of the recession to face completely new or resurgent players that became new titans. e.g. MSFT from 2000 to now is part of the lost decade (on track to generate $17B+ in 09 income). IBM from 1991 to 2000 was an equally poor performer relative to the NASDAQ. Contrarily, I’m not sure that Apple was viewed as a titan in 2000 worth putting a lot of money into, but has had a phenomenal run.Recessions change status quo and players with new business models have taken advantage of those times to realign the value chain in ways we’re not looking at from today’s prism.

  3. Mark

    Don’t expect GOOG to re-emerge from the downturn as the powerhouse it once was. I’m not saying its days are numbered by any means, but the glory days are certainly a thing of the past. The only way we’ll see GOOG go back to pre-crisis levels is if they make a major, systemic change (i.e., acquire another major player, etc). Otherwise, I’d say it’s low on the list of value opportunities. With that said, though, we’re getting near a point where long-term investors will need to start positioning themselves for value opportunities. Needless to say, valuations are cheap but that doesn’t mean timing the market is any simpler.

  4. TMC2K

    As stated before, it really would be much safer and more profitable for you to sell puts during a downtrend. There are also ways to put the odds in your favor that we are actually near a bottom before you risk so much. We may be near a bottom but there is no way to know that for some time.As for GOOG. I don’t invest based on multiples but I thought those who did needed to justify 10x valuations with 10x growth.That is real hard to see anytime soon.Here are some things I’m watching in today’s daily investment post.

  5. fredwilson

    So true

  6. fredwilson

    I don¹t see it happening that way to be honest. There¹s not a lot of lovebetween facebook and google. I think if facebook is bought, it¹s bought bymicrosoft

    1. Steve Frechette

      That’s too bad. Msft’s biggest problem is itself and buying FB would virtually kill the FB mojo. The msft brand is poison. Can’t see that deal working out unless they spin out all of the web properties as a separate entity that can distance itself from the Monkey Dance in Redmond.Maybe FB and amazon then. At some point, amzn has to take off the gloves and realize that they’re basically a shopping search engine that has to go head to head with Google, or merge with them. Amzn is making more cash by referring buyers to the partner sites vs fullfilling the orders internally. That puts them on a collision course with Google. Imagine the targeting potential of combining the meta data from FB with Goog and amzn.

    2. barney

      what about a potential alliance between msft, fb and amazon? all are allles (for the most part) and could work together to seriously hurt google – their common enemy.

  7. Steve Frechette

    Fred, any thoughts about Goog buying FaceBook and Amazon? I’m with you on Apple, and believe that aapl emerges from the downturn as a tech mega force as a result of the iPhone’s domination and having $25B in cash to deploy during. It’s a question of when for aapl, not if in my mind.Goog needs to combine the meta data from Facebook with it’s own collected info to help target the consumer better when they show up at Amazon. The FaceBook meta data is super valuable but not while you’re using FaceBook. Zuck and the FB management need to figure this out and hitch the train to Goog ASAP. Goog spends $2.5B in stock on FB and buys amzn for a combo of stock and cash. Do you think this makes it by the regulators?

  8. michaeldowns

    I would normally agree w/ you, but I bought GOOG last week which is a sure sign that everyone else should start selling.

    1. fredwilson

      That’s how I feel about my stock trading too

  9. cv

    Basing stock decision on earnings: Big Mistake.

  10. tjsweeney

    hmmm, if you go with a dcf on the $10.8b of ebitda, it’s reasonable to argue for a pre-cash $216b valuation on fcf. this is, of course, two times the $108b @ 10x ebitda.(simple assumptions: ebitda ~ fcf; 5% perp growth; 10% wacc…)

  11. D

    I agree that Google seems relatively inexpensive but I don’t think that EBITDA is a great valuation metric for a company like Google because it assumes that depreciation is not an economic cost. This is inaccurate as Google’s expenses to replace servers will likely remain high for the foreseeable future, albeit likely at a lower rate than the $2.4 bil. that GOOG spent in 2007. In my view free operating cash flow is a much better metric. Enterprise value to Free operating cash flow (defined as TTM operating cash flow minus capex) is approximately 17.5x which seems relatively inexpensive given Goog’s growth rate. Nevertheless, the company may face increased competition from Microsoft and Yahoo going forward.

  12. Richard Townsend

    I realize the current economic situation will be a big blow to GOOG’s value however I think they have a bigger problem. I was recently writing and article on the effects of the recession (and other recessions) on unemployment… needed some dates. Because I’m a bit old can’t remember the dates (years) of the recessions/credit crunch’s I’ve been through. Now was it ’79-80′ or ’82 hmm… stock market crash 71-72? I typed into Google “History” “Australian”, “Recessions”, “Years”. Nothing useful at all… just the clutter of the current recession headlines with all the obvious big name sites popping up.I could quote other examples however I feel whomever is building their search ranking algorithm seems to have lost the plot lately… unsatisfactory profit driven search results rather than information satisfying search results leads to dissatisfied customers which leads to a search for alternatives… leading to less income and lower stock prices. Yahoo must be rubbing there hands together, in-spite of their (Yahoo’s) obvious ‘problems’.Ric

  13. CEOmike

    The problem with the google type of tech stock is “technology cracks” can bring it down real quick. There is one brewing at google.Want to make a lot of money with adsense? Put up an adsense page focused on keywords with high PPC values. Get a whole lot of free or cheap hosting accounts. Write a script to run from each of these unique IP addresses to go to the adsense page and click a couple of google PPC ads then have it go to sleep for three or four months.This fraud is google’s “dirty little secret” There are thousands of hackers doing this now! I can think of no way for adsense to work and protect against this kind of click fraud. If advertisers start to wonder where their money is going and the media catches on to this without google demonstrating how they are preventing it – there will be mass exodous from google.

  14. maverick

    As a fundamental analyst, you are making a poor stock choice, in a poor market environment.Even with the emotion in your writing, you truly have no confidnece in this purchase,. because you and every other US citizen truly believe the market will always turn around. It’s just not going to be that way this time around. Thje forex market and stock market is telling us this bear market will stay for many yearsyou say” I think” way too much in your analysis, it tells me you are uncertain in your thoughts.I am a trader of 10 years, and I know for a fact these markets have a long long way to fall.Listen to me very carefully.. you are all making a huge mistake buying Google.. big mistake!http://www.learntotrtadethe

  15. Paul Viau

    The numbers certainly make sense! I think mid Jan is the point when the investors will get back in the pool –so to speak.