The hottest market story for the last year has been the quick rise in the share price of the search engine company Google (GOOG). Google's initial public offering (IPO) was widely criticized by market professionals as being botched – including the Playboy (PLA) interview that brought the unwanted attention from the SEC. The IPO price was lowered from the initial estimates of $100-$135 to the final price of $85 through their modified Dutch auction technique.

Well the IPO was seen by the market as a relative disaster the past ten months have been nothing but success as the shares currently trade at $295 - a three bagger in less than a year for those who were lucky enough to get in at $85.

During the past few months the price has moved above the $300 mark on a few occassions. At times (the Advisor office no exception) there has been talk of a mini bubble in Google's stock. The questions that needs to be asked....

Does this run up make sense?


Are Google's earnings really worth what people are paying for them?


Can they sustain this rate of growth?

We would suggest the answers to these questions are, no, no and well...no.

There are several key factors that will help to give us an idea as to how much the current price makes sense. Now, before we get into our commentary, please do not misconstrue this as a bash on Google 'the company'. We like the company in fact, there are many aspects that really excite us (especially the fact that they actually make money...), however from our perspective, the only place a company as large as Google could possibly fit into our recommendations would be our Core Holdings model portfolio – and that might even be a stretch as we tend to steer clear of companies as large and as well covered as Google.

That said, one of the most important factors we look at for companies added to this portfolio is valuation. The portfolio has a 'value slant' and we are very concerned about how much we are paying for a company and need a wide margin of safety before adding to this portfolio. In our opinion is Google overvalued? Yes. Does Google offer a margin of Safety? No. Therefore, would it make our 'Core Holdings' portfolio? No!

If you look at Google's P/E you will see it sitting at a rather alarming 86.55. This P/E would almost certainly scare us away from a small cap company – but GOOG is worth nearly $100B! Now, granted, in the past four quarters Google's past few quarters have been nothing short of spectacular. However, the current year projections for earnings are $5.57 and next years projected earnings are estimated to be $7.32, a 31% increase year over year. At some point this company is going to miss earnings, even by a little bit, and the share price is going to tumble.

If we were to assume that the earnings for the company could grow at this rate for the next five years taking us to 2010 the earnings per share would be roughly $22 per share. If the share price stayed around $300 the P/E in 2010 would be roughly 14. But what if the P/E didn't fall and share price continued towards the moon as it has – dismissing the ill effects of gravity and fundamentals? What would Google be worth?

At a P/E of 85 and earnings of $22/share simple math tells us Google would be worth $1870 per share. Google would be worth more than $500B!!! That would likely be the largest company in the world! That's right, bigger than Exxon Mobil (XOM), General Electric (GE), Microsoft (MSFT) and Citigroup (C) currently. In fact if Google hit $600B it would be larger than Microsoft and Citigroup combined!

We are not saying that "investors" - and we use the term loosely at this point - are going to continue paying the high price they currently are for a dollar of Google earnings, but this does demonstrate what would happen if the euphoria surrounding the rather young company were to persist.

The largest competitor for Google is Yahoo whose P/E is currently at 31.52. Those buying Google's stock are paying nearly 3 times as much for the earnings. Are Google's earnings worth three times as much as Yahoo's? In our opinion, no.

The past year has been great for Google and even better for the shareholders, and there very well could be some more short-term price appreciation. We are not saying that Google is teetering on the brink of disaster, it may very well hit $400 before all is said and done.

But getting in to Google at this price is gambling. Yup, speculation pure and simple. At this point an "investment" in Google is not possible, it is a gamble. You start to play, what we like to call at the Advisor, the sentiment game. You are betting on market sentiment. You are betting that over-zealous analysts the world over will continue to slap higher and higher price targets on the company and a "fool" will buy the stock in hopes the sentiment will continue to be positive and they will be able to sell it to a "greater fool" who will take it off their hands for a gain.

At the Advisor we do not play the sentiment game. We invest in companies. In fact one of our stated tenants is to "buy a business" as opposed to "renting a stock" as Warren Buffett is so famously quoted.

For this reason there is as much chance we would go long on Google – at this price - as Jose Canseco signing with the Orioles....

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