Does Google rhyme with “bubble?”

It’s always fun to see brokerage analysts one-up each other with price targets – all the while maintaining the illusion that the latest outrageous figure is ‘based on fundamentals,’ or represents a ‘pretty attractive multiple’ based on projected profits 10 years down the road. Mark Stahlman of Caris & Co. is the latest to play this game, with his $2,000 target for Google.

Of course, Mr. Stahlman – who is described in his bio as the man who helped bring America Online public – says $2,000 isn’t actually a target per se. He says it’s merely an extrapolation based on current revenue patterns, and involves applying a Microsoft-style multiple to the $100-billion worth of revenue that he says Google could have in the future.

In case you’re wondering, $100-billion would be more than twice the annual revenues that Microsoft currently has, and would put Google in the same league as IBM and General Electric – while applying a multiple befitting a company like Microsoft, which has profit margins of about 80 per cent. Does that sound realistic?

In the end, it doesn’t matter whether it’s realistic or not. It’s the same game that Henry Blodget played in 1998 with Amazon, when his $400 price target got the attention of Wall Street. As Paul Kedrosky notes, it’s all about making an extreme forecast – not about whether it makes any sense or not. Mark Evans says it’s nice to see analysts thinking outside of the box, but I think some could use a little more time inside the box.

Update:

It’s somehow fitting, in a karmic sort of way, that Henry Blodget has one of the most nuanced posts about Google and its share price. He makes 10 solid points about how to arrive at a fair value for a stock – most of which boil down to “no one really knows” – and of course, ends off with his standard (and legally obligated) disclaimer that none of his comments should be perceived as investment advice. Too bad more analysts don’t have the same disclaimer. Andrew Ross Sorkin has also written something for the Times about it.

Leave a Reply

Your email address will not be published.