Last Sunday I posted the funniest comment I received during the week that stimulated me to write: Pamela Anderson is a headline - not news - but SIRIus. This week I thought I would follow-up with another amusing story stimulated by a comment I received informing me that "Google earnings growth will most likely continue to run at 50%+ for the next few years." I had given Google Inc. (NASDAQ: GOOG) credit for a 50% increase in earnings this year trailing to 25% next, but I was corrected.
So what would 50% growth actually mean in real dollars and cents. By my definition I would categorize "few years as at least three or four. So lets run the numbers: Google closed Friday, February 2, 2007 with a capitalization of $134,305,000.
If you anticipate 50% growth this year (even from Google's current depressed level) you reach $201,457,500, my outside limit. A few years more after that means another 50% spurt brings you to $302,186,250 in 2008 followed by $453,279,370 in 2009 and $679,919,500 in 2010. For some perspective, ExxonMobil Corporation (NYSE: XOM) the largest company in the world by capitalization has reached approximately $440,000,000. I do not think we have to add the fourth year at 50% -- it's silly enough already!
Google has taken quite a hit this week, but if I used the valuation from the time of the comment it would have handily passed $700 billion. I just cannot envision Google as the largest company in the world, now or in a few years.
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Sheldon Liber is the CEO of a small private investment company and the vice president for design and research at an architecture & planning firm.
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Reader Comments (Page 1 of 1)
3-04-2007 @ 8:32PM
Richard Ryan said...
Liber's comment shows typical ignorance of "earnings growth" vs Capital valuation. Earnings growth simply means growth of profit. A company's stock price is a function of future earnings (profit) discounted to present value (an oversimplified explanation, but it will do for now).
Goog made approx 10.50 per share in 2006. A 50% growth in earnings simply means they expect Google to have earnings of approx 15.75 in 2007, 23.50 in 2008 and 35.00+ in 2009. The estimate for 2007 is in line, but the outyears would be very difficult to achieve.
If Liber is really the CEO of a private investment company, you will want to beware of this company.
3-04-2007 @ 11:35PM
Sheldon L said...
R. Ryan,
I can't imagine that you would challenge me in public without doing ALL the math. Google has 306,157,000 shares outstanding. Using YOUR 2009 earnings of $35 per share, which I agree is speculation, and a P/E of 40 which is less than today based on 50% earnings growth you get a share price of $1400.
While it is true I am assuming a relatively constant P/E ratio it is only reasonable if we are already assuming constant earning growth. 306,157,000 shares x $1400 = $428,619,800,000; a little less than my figure in 2009 but that's with a reduced P/E ratio.
You can increase the earnings by 50% or the capitilization by 50% and arrive in the same place. Unless you reduce the P/E ratio, meaning what people are willing to pay now for future earnings, your discounted cash flow analysis ends up in the same place. And whether you view this projection in your fashion or mine you still end up with a valuation 50% greater than XOM in 2010 - absurd!
Thank you for making the Sunday Funnies even more so. Peace
3-05-2007 @ 6:06AM
passingby said...
GOOG has such a high PE at the moment because there is an anticipation for rapid earnings growth, which in turn makes the forward PE look more attractive.
What I do not understand is why Liber assumes a constant P/E...It is never late to say Mea Culpa.
3-05-2007 @ 1:55PM
Sheldon L said...
passerby,
Thanks for taking the momentary pause to comment. As stated I left the P/E where it at was because the growth is not changing in the example. However, for comparison, and to support the P/E level, AAPL has a P/E of 31.25, SBUX has a P/E of 38.38 and EBAY has a P/E of 38.71 with nowhere near Googles growth projections. Even at these lower P/E's Google would end up as one of five largest public companies in the world and I think that is very funny.