Valuation VI. Example -> GOOG

Here's an example. Look at GOOG. The stock is about $470/share and the 2008 earnings estimates are $19.25/share, so its forward PE is 24x. [earnings source: Daily Graphs at http://www.dailygraphs.com/ (I subscribe to that good site.)]

Those 2008 estimates are about 27% over 2007 earnings, but are 339% of actual 2005 earnings, which is a 50% compound average growth rate. The last four quarters year over year average growth rate is 82%. GOOG has a very strong market position in Internet advertising.

I have a hard time conceiving that GOOG won't be able to grow earnings at a minimum of 25% per year for the next five years. So after that IF it saturates the world online advertising market AND can't develop new revenue & earnings sources, GOOG still should be able to growth at the nominal GDP growth rate of 5%. This scenario seems very strong, so I think I can use my standard model to value the stock: 25% earnings growth for the 5 year horizon, 20x PE off year six earnings which are 5% over year 5 earnings, and a 10% discount rate of the conservative earnings assumptions.

[NB: using 10% discount rate is ONLY valid for conservative earnings assumptions. If you use more aggressive - aka riskier - numbers, you MUST bump your discount rate appropriately].

I plugged those numbers into my spreadsheet: $910/share, or a 47x PE off 2008 estimates. The matrix range is $634 to $1,377.

Golly, I need to buy more GOOG.

PS: The weekly chart shows a lot of distribution for about a year. I suspect that is big early holders selling around the $500 range. The pattern looks a lot like a huge bullish C&H or ascending triangle. The stock has been basing after breaking up out of a prior bullish ascending triangle around $450.