Analysts in Google Inc (NASDAQ:GOOG)‘s $1,000 club were probably hoping for some upside surprise when the company announced second-quarter earnings on July 18. Unfortunately, the report didn’t get the Street excited. Could a dull earnings release prevent Google stock from reaching that big number?
Crunching the numbers
Analysts are rallying behind Google Inc (NASDAQ:GOOG) stock, with a median price target of $998. Among the 38 analysts covered by Yahoo! Finance, the high target is $1,175 and the low target is $810. At $885, these targets mean very little downside risk and excellent upside potential… at least according to this group of analysts.
Are they right? Let’s double check.
Ultimately, the value of a business is a function of its future earnings potential. So let’s first make sure that those’ price targets are truly functions of their earnings estimates.
For the next five years, analysts, on average, expect EPS to grow at about 14.5% per annum. Given these EPS growth rates for the first five years, an average of 7.5% for the next five years, and a 3% for years beyond 10 years, a discounted cash flow valuation yields a fair value of about $958 per share — not too far off analysts’ median target of $998. So at least we know these analysts aren’t fudging some other factor beyond earnings in order to reach a pretty target.
Now, let’s check their growth assumptions based on historical non-GAAP year-over-year growth rates.
Google Inc (NASDAQ:GOOG)’s year-over-year EPS growth rates are certainly declining. The mobile and multi-screen operating environment is hurting the company’s profitability. But a purely objective look at this trend suggests that analysts’ average estimate for 14.5% EPS per annum for the next five years seems fairly conservative — especially when you take into account Google’s cash hoard that could be used to buy back shares during those five years.