Novice Investing - Googling Google Growth Rate

Date: Thursday 20th 2008f November 2008 04:51:47 PM

Googling Google Growth Rate - 12/2/2005

By: Novice Investing Staff

The King Of Search right now is Google Corp. (GOOG). There is no doubt about it. With almost 50 % market share in the search business, Google raced ahead of its biggest competitors, Yahoo! Inc. (YHOO) and Microsoft Corp. (MSFT) MSN division. It is currently trading at $ 120 Billion market capitalization, about twice the number two player in online search, Yahoo! Inc.

Share price is currently traded at $ 400 range. For fiscal year 2006, earning per share is expected to come in at $ 8.54. At this price, what is the expected earning growth rate for Google over the next five years? Subtracting the cash from its balance sheet, the net value of Google's business is about $ 375 per share. At current interest rate, the fair P/E value for a 0% growth stock is 13.4. Assuming that Google will stop growing at year five, therefore, earning per share at year five is expected to be ($375/13.4) = $ 28.0 per share. The present value of this earning is $ 22.5 per share. Whipping out a calculator shows that Google need to grow earning by 26.8 % per year over the next five years.

This is a little bit surprising. At a glance, Google stock looks expensive, considering that it has a market capitalization of $ 120 Billion and has risen 300% since its IPO last August. However, comparing our calculation with eBay, Google is a tad cheaper. At current price, investors expect eBay to grow 34.9 % versus 26.8 % for Google over the next five years.

In our opinion, it is easier for Google to achieve its growth target than eBay. For one, eBay has grown internationally for quite some time and earning growth seems to slow in recent months. Meanwhile, its acquisition of Skype is getting a tepid response so far. On the other hand, Google just scratch the surface of a new form of performance-based advertising. This type of advertising is not common overseas. Therefore, the potential for growth is there. With a lower expected earning growth rate and favorable industry trend, Google is poised to hit its expectation for 26.8 % earning growth rate. eBay might have a tougher time to grow earning by 34.9% given that it already dominates the online auction market place.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Google Inc. (GOOG) or any other securities.

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