Friday, October 19, 2007

Google GOOG Earnings: Growth rate slowed further Valuation is Insane.

Google managed again to get amusement of the crowd by beating expectations, but the truth is that from now on the higher it goes the harder will it fall.

Growth rate slowed further to 57% Y/Y from 58% in Q2, and 63% Q1. Licencing and other revenue is still miserable 1%. Company has only one revenue stream and continue to be "a one trick pony". International revenue brought 48% and Google nicely profited from falling USD:
"International Revenues - Revenues from outside of the United States totaled $2.03 billion, representing 48% of total revenues in the third quarter of 2007, compared to 44% in the third quarter of 2006 and 48% in the second quarter of 2007. Had foreign exchange rates remained constant from the second quarter of 2007 through the third quarter of 2007, our revenues in the third quarter of 2007 would have been $24 million lower. Had foreign exchange rates remained constant from the third quarter of 2006 through the third quarter of 2007, our revenues in the third quarter of 2007 would have been $121 million lower."
Net Income margin is slightly higher at 25% of Revenue vs 24% in Q2 and lower then 27% in Q1.
Google managed to increase its Free Cash Flow to 1.1 billion USD from 0.7 billion in Q2, but it was "spiced" by reduced CAPEX to 0.55 billion from 0.58 in Q2 and 0.6 in Q3.
Revenue per Head has declined to 266 000 USD from 281000 in Q2.
It could be all very good news on solid company performance, but if you look at valuation at 640 stock is valued at ... 70 times Free Cash Flow (trailing). What is "normal"? - just 30-40 according to "value" analyst Henry Blodget. Even if Google will be granted 40 ratio for its market leader status its share price should be at around ... USD 367.
With all risks related to recession and ongoing competition Google's new target price at 800 by 2008 year end is "only modest" 23% increase from USD650.
Should the stock continue to rise on recent hype over USD650 it will be in parabolic move and I will build my put positions again.
Until Google corrects to "conservative" levels of valuation, market bubble will be growing and its burst after housing crash will be remembered for years.

More on Earnings to follow.

No comments: