Lisa Baertlein
SAN FRANCISCO: Like the mathematical term that inspired its name, the valuation of Google Inc. is expected to amount to a very big number when it breaks new ground by selling an estimated $2.7 billion in stock through a Dutch auction of previously unseen size.
But as anticipation over the stock sale mounts, observers are batting around a wide range of estimates regarding just how highly investors will ultimately value the Web search leader.
Before the company announced its planned initial public offering one week ago, analysts had pegged Google's post-IPO valuation around $25 billion -- bigger than online retailer Amazon.com but still smaller than that of rival Internet media company Yahoo Inc.
But given a look at Google's profitability and growth, estimates now run from just under $30 billion to more than $50 billion, which would value the company almost on par with the Internet's brightest star, eBay Inc.
"I think it is going to be almost impossible to get your hands around what price it will come at. You are going to (have to) bid pretty high if you really want shares and believe in the company," said Knox Fuqua, fund manager, AAM Investments.
Google -- a play on "googol," a mathematical term for 1 followed by 100 zeros -- has made it clear that it wants a more egalitarian offering that fully and fairly values the company without the volatility that accompanied boom-era IPOs.
Google even warned in its prospectus that the "winner's curse" may rear its head if victorious bidders feel they overpaid for shares and prompt a sell-off.
GUESSING GAME
Given that Google has not issued a 2004 profit forecast and has not yet said how many shares it plans to sell, assigning a value to the company is an inexact science. Nevertheless, analysts agreed that Google will be richly valued due to its profitability, growth and popularity.
Based on Google's reported first-quarter profit excluding stock-based compensation and an assumption that growth remains static -- which analysts say is highly unlikely given its recent tear -- Google's 2004 net income would be $561.8 million, up nearly 68 percent from a year ago.
Yahoo now trades at a multiple of 81 times estimated 2004 earnings per share. Taking that 81 and multiplying it by Google's estimated 2004 profit would value the company at $45.5 billion. At eBay's current multiple of 69, Google would be worth $38.8 billion.
"Google is a high-growth story and as such the stock will need to grow into a premium valuation in order to generate significant investment returns post-IPO," said Janco Partners Inc. senior analyst Martin Pyykkonen, who currently estimates Google's market capitalization at $35 billion to $40 billion.
Yahoo and eBay have defied naysayers by consistently delivering on or exceeding Wall Street targets. Google, by contrast, has a relatively short track record and in its prospectus warned of slowing growth and slimmer margins.
The threat of competition also looms large. Yahoo's $1 billion-plus investment in search has put it solidly back in the running and Microsoft Corp. is waiting in the wings as its MSN unit toils away on its own search offering.
Whether Google will keep its pole position or be one of several capable players "is still an open question," Pyykkonen said.
In a recent note, American Technology Research analyst Mark Mahaney took his first stab: "We very tentatively value Google at $30 billion."
Based on his own 2005 profit estimates and the multiples of other leading Internet firms -- including Yahoo, eBay, Amazon and InterActiveCorp -- Mahaney came up with a valuation range of $29 billion to $39 billion.
"We would be cautious about granting Google a multiple as rich as eBay and Yahoo this early on," he wrote in the note.
"We hit the pause button when we read that Google does not plan to 'give earnings guidance in the traditional sense'," Mahaney said. "Our take is that by not being willing to give quarterly guidance, Google has directly increased the risk to its shareholders, which should arguably translate to a lower multiple."
Barron's, a weekly publication, projected a valuation of up to $51 billion, but at a market cap of $30 billion said Google would represent a "bargain, relatively speaking."
(Additional reporting by Mark McSherry in New York)
© Reuters 2004