Aggressive or overvalued?
Is Google Inc. worth it?
The estimated price range for Google's planned initial public offering, between $108 and $135 per share, implies the company itself would be worth $29 billion to $36 billion. That's a lot of wiggle room, but focus on the $36 billion figure on the high end of the range.
The best way to evaluate Google shares is to compare their estimated value to the company's recent past business results, expectations for future performance, and a side by side comparison with a similar public company.
Google's latest financial results, updated for public consumption yesterday, suggest the company continues to grow quickly and will probably earn $300 million or more this year. It's unusual to find companies going public with much of a profit track record, let alone earnings of that magnitude.
But Google's likely 2004 profits, coupled with the estimated IPO price range, suggest the company will go public at a value of perhaps 100 times earnings. That's a big number, requiring aggressive growth expectations.
Google will grow in the year ahead and probably beyond that. Estimating how much the company actually will grow is the riskiest proposition of all, but consider the results of the past six months for some perspective.
Google's financial performance in key categories soared during the first half of this year, compared with results from the same period last year. Revenues were up 140 percent to $1.4 billion. Income from operations climbed 72 percent to $326 million. Net income jumped 146 percent to $143 million. Cash flow from operations more than doubled to $370 million.
Based on those numbers, could you imagine Google's performance climbing 50 percent or doubling next year? Clearly that's possible, but professional investors are eager to question Google executives (they will make a road show appearance in New York today) for more information to bolster forecasts.
I asked Marc Klee, manager of the John Hancock Technology Fund, what he would like to hear from Google officials. He wanted more detail on the company's business plan for the next 12 to 18 months and management's expectations for internal growth, compared with opportunities from acquisitions and joint ventures. He wants to know whether Google plans to hire other key executives or whether the management team is set.
Finally, you won't have to look far for another company to compare to Google. Yahoo Inc. is a fair measure in all ways.
Yahoo's stock market value stands at $38 billion, slightly more than the high end of estimates for Google. Yahoo generated more revenue ($1.6 billion) and higher net income ($213 million) during the first half of the year.
One key financial measurement, cash flow from operations, would seem to favor Yahoo by a wide margin. But the companies end up almost exactly even when Yahoo's $121 million in tax benefit from stock options, an unfair advantage, is excluded from the calculation.
The Yahoo comparison suggests Google's price range is expensive, but not out of the question. One key caveat: Yahoo shares have climbed 72 percent in the last year to match valuations estimated for Google.
By all measures, Google's estimated value is very aggressive but not out of the park for the most optimistic believers. Those estimates require stockholders have faith that profits will double, then double again within a few years.
But I have my doubts the actual price will be confined to current estimates. Google's unusual auction-style IPO is designed to take the froth out of trading once the offering is complete. But the power of the hype may simply be rerouted into the auction bidding and drive the ultimate IPO price up from very aggressive to hopelessly overvalued.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com. 