Tuesday, September 18, 2007

Google - The Time is Now

The time is now for the king to take his throne. First, lets take a look at the two charts above. In the first chart, we can clearly see that Google's stock price moved past resistance around $530. It is also worth noting that the price moved past the 50 day moving average (another bullish sign).

If you talk to any technician, they would probably tell you "a gap fill" is imminent. If this is the case, we have about twelve more dollars in upside. According to the second chart, if the gap fills, the stock would move past the ascending channel. A breakout of a technical channel is seen as a bullish (on an upward breakout), which would take the stock even higher.

Now that we have the technical picture out of the way, lets take a look at the fundamentals. Google, which trades at a P/E of 45, expects to earn $15.26/share in 2007. The company is also growing at a 35% clip.

According to Jim Cramer, you should never pay more than twice the growth rate-- this would put a cap on Google's P/E at 70. Let's assume that Google beats earnings next quarter, as it has done all year, its feasible to say GOOG earns $16/share.

Now lets use a P/E of 50, Yahoo current multiple, and multiply it by $16.

50 x 16 = $800

Lets say Google received a multiple of 60, which is very possible given the growth rate, but only earned $15.26 (current estimates in 2007), the stock would be worth:

60 x 15.26 = $915.6

The company reports October 16th, and it could very well be another blowout quarter-- sending the stock price even higher. In the short term, If BIDU can tack on 30 points in two days off of video advertisement news, why can't GOOG do the same-- Have you heard of YouTube?

Note: For fun, lets see where the stock could be in two years. I have calculated earnings for 2009 around $25/share and will use the current P/E of 45.

25 x 45 = $1125

You could possibly earn 100% return on your investment in two years. This is why I am long Google's stock.