Google (GOOG) to infinity and beyond!!!

We believe that Google (GOOG) is now ready to rock higher. Last January, the stock was at $475 and tonight it closed just under $500. The stock has gone nowhere for a year. We owe the credit for this stock coming into our portfolio to one of our favorite and most insightful institutional clients in Avon, CT. He got us thinking about Google during a discussion about the likelihood they would acquire Sun Microsystems (SUNW).

For those who like options we will buy a June 700 call for $2.10. The premium in Google calls is very expensive but is rational. This is an extremely speculative options trade.

How can we recommend this stock? Easy!

First, earnings estimates for the year just ended are $10.30 and 90 days ago were $9.97. 90 days ago the December 07 numbers were $13.07 and now are $13.79. Google does not guide the street and analysts are left guessing and are constantly on the low side with their estimates. Next year's number could easily be $15. The December 2006 P/E will be around 48.5.

Therefore, if it can come in at $15 and the P/E were to remain the same our future price would be 15 X 48.5 = $727.50. I threw these numbers by my Dad last night and he pushed me to ask what is the risk? A very good question. This is what Tuck MBAs and former marines do. They never quit asking questions or pushing you to do that last mile. Thanks for the insight as the readers will like this extra step.

If the $15 were to be reached in 2007 and the P/E were to fall to 30 then the price would go to $450. A second scenario would be for the earnings to drop to $10 and the P/E to drop to 25 then the price would go to $250. However, if the P/E were to drop to 40 and Google could still hit $15 in earnings then the price would go to $600. There is your risk analysis and a good exercise that anyone with a major position should undertake a few times a year to determine if the stock is ahead of itself.

We note $800 invested in Cisco (CSCO) when it came public was worth $800,000 at the peak ten years later in 2000. Google came public in August of 2004, a little less than 2 1/2 years ago. A growth stock can grow for 10 years if the business model is great. Cisco split its stock 10 times between 1990 and 2000. Google has yet to do one stock split. $800 invested in Google is now worth around $3,600. We note the company has no long term debt with over $10.4 billion of cash and short term investments. Sales will exceed $9 billion from $6 billion.

Once the stock clears $500 it is off to the races. We will be long this stock for a ride it has not seen the likes of in two years. We note the Erlanger Short Intensity is 77%. Our friends at Bluehawk have a current target of $530.23 with a 39 week target of $691.49 and a 3 1/2 year target of $983.92. This valuation is based on cash not on some contrived EBITDA number. Clearly, the growth must be maintained but if Google can achieve such growth then this stock could rival perhaps the greatest growth stock of all time Cisco (CSCO) or Wal-Mart(WMT).