Google: Strong Quarter, Still Expensive

From Internet Outsider

One of Google’s earliest self-conceptions has certainly been borne out: It’s no ordinary company.  Ordinary companies just don’t grow this way.  In fact, it’s probably safe to say that no company has ever grown so big and so dominant so fast (If anyone knows of one, do tell).  In Year 8, Google is about to smash through the $14 billion revenue-run-rate barrier.  Annualized free cash flow has now cleared $2.5 billion.

This said, Google-the-company is different from Google-the-stock.  You can be in awe of one and ho-hum on the other.  Even with a flat stock price and extraordinary growth over the past year, Google-the-company has yet to grow into its valuation.

At $490, Google’s market cap is just north of $150 billion.  This is 60X run-rate free cash flow of $2.5 billion and 50X a generous $3 billion FCF estimate for 2007.  If the global economy stays strong and the company can haul back on its CAPEX in future years, perhaps FCF could hit $4 billion or $4.5 billion in 2008.  At that level, the FCF multiple starts to look more comfortable (33X-38X), but it would still be far from cheap.  And banking on $4-$4.5 billion in FCF in 2008 at this point requires some serious faith.   

On the positive side, one point that jumped out in the release was the new language concerning future CAPEX: Although Q1’s CAPEX was a startling $597 million, the comment about future 2007 spending is that it will continue to be "significant."  This in contrast to previous releases in which the company said the growth rate of CAPEX would exceed that of revenue.  Despite Q1’s enormous number, therefore, I take this as another indication that CAPEX should start to flatten, which will cause free cash flow to accelerate.

Posted by Henry Blodget on April 20, 2007

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