Google's stock expected to reach $350

June 1st, 2005

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Credit Suisse First Boston is the latest brokerage to increase its expected price target for Google's shares above $300.

Shares of the Internet search engine quickly jumped $7.51, or 2.7%, to $284.78 after analyst Heath Terry boosted his price target on the stock to $350 from $275.

Terry carries an outperform rating on the stock, which closed at an all-time high of $277.27 on Tuesday.

"While there will certainly be plenty of volatility in the stock price, particularly over what is supposed to be the slower summer period, we believe shares have further to go given the momentum in the company's core advertising business, the growing impact of new business like Gmail, Froogle and Local and a valuation that, relative to the company's growth rate, is far from stretched," Terry wrote in a research note.

With his move, Terry joins a growing list of analysts projecting a price of at least $300 for Google.

Think Equity Partners analyst John Tinker expects shares could hit $330 over the next year, while JMP Securities' Bill Morrison has a $310 price target for the shares. And on Tuesday, Piper Jaffray's Safa Rashtchy moved his price target up to $300. See Net Stocks.

"Google is currently embedding real asset growth of roughly 19% over the next five years and cash flow return on investment of approximately 24%," CSFB's Terry told clients. "Clearly we believe both the growth rate and the potential cash flow return on investment are likely to prove too conservative."

On a relative valuation basis, Terry noted that Google is trading roughly in line with Net bellwethers Yahoo Inc. (YHOO: news, chart, profile) and eBay Inc. (EBAY: news, chart, profile) , though he argues that Google should trade at a premium to both companies because of its superior growth rate.

Based on earnings before interest taxes depreciation and amortization, "we believe Google can grow an average of 45% annually over the next three years, while eBay and Yahoo should average roughly 38% over the same period," Terry said.

For the current quarter, the analyst believes trends in volume and pricing are positive.

Citing query volume data from Nielsen and pricing surveys, Terry believes growth is tracking at roughly 5% sequentially vs. consensus expectations of about 2%.

"So while we are cautious about the potential for an eBay-like event down the road as investor expectations rise with the share price, it does not appear to be a near-term risk," Terry concluded.

Source: Market Watch

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