Google just announced it would be introducing $4 billion worth of new shares into the market in order to raise capital for acquisitions while the stock price is still high. Of course, this has the unfortunate problem of diluting the share value of anyone who holds Google stock (I’m not one of them). This article makes several good points:
In a filing with the Securities and Exchange Commission, the company said it would use some of the cash to make unspecified acquisitions, while the rest would be used for general corporate purposes. But it?s no secret that Google?s success has made it a target of large technology firms such as Yahoo and Microsoft, among others. And now the company is essentially admitting it needs more money to develop new products to fight off competition.
Also there was a good analysis of an appropriate valuation for the stock:
To look at Google, Damodaran fired up that same valuation model, which he designed specifically for valuing fast-growing firms. It employs a two-stage growth model that includes a single high-growth period followed by a stable growth period. (After all, no company can grow faster than the economy forever.) And it takes into account everything from operating leases that grant the use of equipment and other assets to future dilution from outstanding stock options. Using numbers from Google’s most recent quarterly financial report, Damodaran made several optimistic assumptions. He assumed revenues would climb 60% annually for the next three years before gradually declining to a stable growth rate of 4% a year after ten years (for a compounded average of 27% per year). He also assumed that pre-tax operating margins would decline gradually to 20% in ten years, from a current 32%, which is even more optimistic since that would yield operating income of almost $10 billion.
In the end, Damodaran’s analysis produced a value that’s far less than the current stock price. He figures Google is currently worth just $110 per share. And this assumes that the company will grow like gangbusters, taking in $49 billion in sales by mid-2015, compared with just $3.2 billion last year—an increase of some 1,400%.
For his part, Damodaran is baffled that anyone would pay close to $300 per share for Google. To justify paying this much, he says, you will need compounded revenue growth of about 40% a year, which would generate revenues of $135 billion and operating income of almost $30 billion in ten years. “If you believe this can happen, the stock is a good buy,” he says. “Is it possible? Sure. Is it likely? I don’t think so.”