I’m not sure about you but I’m Googled out! Let me explain. Mega search engine Google Inc. (NASDAQ/GOOG) touched a new record high of $309.25 on June 28. Its market-cap reached a whopping $86 billion, placing it 22nd as far as the largest publicly traded companies in the U.S.
The pure momentum play has tripled since its initial public offering back in August 2004. The company has so far satisfied the demand for exceptional revenue and earnings growth that has fueled the stock’s meteoric rise. But before you decide to jump in, be aware that Google is highly vulnerable to a significant selloff if it fails to deliver more exceptional earnings or revenues.
On July 21, investors will be eyeing Google’s second quarter report. The average earnings estimate calls for Google to earn $1.19 per diluted share, according to data collected by Thomson Financial Network. The number would be more than double the earnings of the previous year.
But the question is, Will $1.19 satisfy the momentum traders? I wouldn’t bet on it. Trading at 56.22 times its estimated FY05 EPS of $5.18, the stock has already priced in strong growth.
Hyped up momentum stocks like Google are always at risk of a major selloff on any sign of weakness. Even matching or beating the estimate by a small margin will drive investors to the exits. The 2004Q3, 2004Q4, and 2005Q1 saw earnings beat estimates by 25%, 19.5%, and 40.2%, respectively. Should the Q2 fail to return similar numbers, it could get very ugly.
Going forward, to maintain the superlative revenue and earnings growth trend, Google must continue to move forward. On this front, there is speculation that the company may be on the acquisition path. One company rumored to be a takeover target is leading China-based Internet search company Baidu.com Inc., which is expected to launch its initial public offering in the U.S. later in the summer. Google was one of the early investors in Baidu.com and holds a 4% interest.
The acquisition of Baidu.com would make sense for Google, as the Chinese company holds a commanding 45% share of the Chinese Internet search market, versus 22% for Google. The addition of Google would make the company the clear market leader in what many pundits expect will be one of the strongest Internet growth regions in the world.
Google recognizes the importance of growing its revenue and earnings to satisfy demanding investors, who have made many at Google extremely wealthy. So, in two weeks, Google will either explode upwards on another exceptional quarter or implode on less than stellar results. The market is demanding, and Google will need to deliver.