Fifteen months later, it looks like, if anything, they underestimated investors' enthusiasm for their fast-growing company.
Google's stock price continued its upward march Monday, finishing the day at $423.48 per share, giving it a $125 billion market capitalization. That was just a smidge below its all-time high. Still, Monday's closing makes Google more valuable than eBay and Amazon.com combined, dwarfs Time Warner's $84.35 billion market cap and even tops networking king Cisco Systems, which has a $107.4 billion cap.
The question now, of course, is just how high can Google go?
"Take an '8' and turn it sideways. You get the sign of infinity. That's what a lot of people think (Google) is worth these days," said Scott Devitt, an analyst at Legg Mason Wood Walker.
Will it take Google long to leapfrog Intel and its $161.9 billion cap? And is it so far-fetched to imagine Google's cap one day surpassing even Microsoft and its $295.4 billion market cap, to become the most valuable company in tech?
Though no analysts will go quite that far, more than a few think Google still has plenty of room to grow. A week ago, for example, UBS Securities analyst Benjamin Schachter raised the firm's price target on Google from $430 to $500, saying in a research report that Google "is a paradigm-changing company, and we believe in its long-term ability to leverage its infrastructure and talent in innovative ways."
Analysts who are raising the price target for Google's shares over the next six to 12 months are basing their forecasts mostly on what's called the forward price-to-earnings ratio, or forward P/E. That's the price of a stock divided by the analyst's forecast for next year's earnings. The P/E indicates how much investors are paying for a company's earnings power. The higher the P/E, the more investors are paying and, it's assumed, the bigger the risk.
Google is now trading at 45 to 46 times 2006 earnings expectations, compared with eBay at about 45 times 2006 earnings expectations and Amazon at about 40 times, analysts said.
Piper Jaffray analyst Safa Rashtchy, for one, doesn't think Google's share price is all that crazy.
"Not only is Google the biggest player in search, but it is growing faster and they're more profitable than anyone else," said Rashtchy, who has set a six to 12 month price target of $445 to $450 for Google. "I think it can maintain (share price) multiples of around 50 times next year's earnings for a while, while there are still new developments at Google."
Jason Avilio, an analyst at First Albany Corp. justified setting a $450 price target for Google for the next six months to one year because of the company's strong revenue growth. In the third quarter,of $1.58 billion, up nearly 100 percent from a year earlier.
Google "is still trading at a relative discount to its growth," said Avilio. Plus, "the global ad market is an enormous opportunity. I think the search opportunity is big enough to support the market cap where it is today." In the United States alone, online advertising is expected to grow to $18.9 billion in 2010, according to JupiterResearch.
But other analysts, such as Legg Mason's Devitt, aren't convinced.
"Unless Google diversifies its revenue stream pretty significantly over the next 12 months they will hit a wall, I think, in terms of growth," he said.
"My call is to not invest. There's too much risk at (a market cap of nearly) $130 billion that you could be wrong," Devitt said. "The shares are moving because of the P/E multiple, but (the P/E multiple) is irrelevant to the long-term (five to 10 years) potential of the business" because of the swift changes in technology in the search industry and the competition Google faces from the likes of Microsoft and Yahoo.
Amazon and eBay may have forward P/E ratios that are similar to Google's, but they've been around longer and are far less dependent on one type of revenue, he said. "Anyone who invests on that (P/E) simple math will soon be parted with their money," he said. Lauren Rich Fine, an analyst at Merrill Lynch, was also cautious, releasing a research note Monday that maintained the firm's "neutral" recommendation for Google's stock "with anxiety." She also cited the need for Google to expand out from its advertising base, which represents as much as 99 percent of its revenue.
"On a longer term basis, the onus is on (Google) to develop revenue streams beyond search," she wrote. "This is not a stock for those with a weak stomach."