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Sunday, October 22, 2006

Google gaining more ground

Industry analysts predict stock will surpass all-time high, reaching $500 to $600 a share

SAN FRANCISCO -- Google Inc.'s stock price surged to a nine-month high Friday, reflecting Wall Street's deepening admiration for the Internet search leader as it continues to make extraordinary growth look routine.

The Mountain View, Calif.-based company's shares climbed as high as $460.10 before falling back slightly to close at $459.67, an increase of $33.61, or 7.9 percent, on the Nasdaq stock market. The run-up created more than $10 billion in shareholder wealth and left Google's market value at $143 billion after eight years in business.

By comparison, 67-year-old Hewlett-Packard Co.--the world's largest technology company--has a market value of $108 billion.

Google's stock hasn't been this expensive since the first half of January, when the price reached its all-time high of $475.11. Most industry analysts expect Google to smash through that barrier soon, estimating the shares' value at anywhere between $500 and $600.

Those lofty price targets look more realistic after Google's third-quarter profit nearly doubled to $733 million, surprising even the most bullish analysts. Through the first nine months of the year, Google earned $2 billion on revenue of $7.4 billion.

The performance illustrates the substantial advantage that Google has built over its chief rivals, Yahoo Inc. and Microsoft Corp., in the rapidly growing online advertising market.

"We believe the company is rapidly becoming THE digital advertising agency for every company in the world," Stifel Nicolaus & Co. analyst Scott Devitt wrote in a research note Friday. "If it succeeds, the financial returns could potentially be significant."

Underscoring his confidence in the company, Devitt predicted Google's stock price will hit $554 in the next year, up from his previous $500 estimate.

Google's robust third-quarter growth, generated in the typically sluggish summer season, bodes well for the coming holiday shopping season when ad spending peaks. And if recently declining gas prices fall even further, Google could profit even more as advertisers step up their pursuit of the extra money in consumers' wallets.

The average analyst estimate for Google's fourth-quarter earnings rose Friday by more than $30 million, or 10 cents per share, according to Thomson Financial.

Even one-time Google skeptics see few headwinds facing the company.

When Google's stock reached its record highs earlier this year, Standard & Poor's analyst Scott Kessler concluded investors had gotten carried away and lowered his price target to $370. The stock price subsequently slumped as low as $331.55 in early March.

This time, though, Kessler believes the best is yet to come, prompting him to raise his price target to $500 on Friday. "It looks like it's Google's game to lose," he said.

For all its success so far, Google may just be scratching the surface of its moneymaking potential.

For instance, Google's search engine currently serves as the advertising vehicle for 300,000 to 400,000 businesses with Web sites, American Technology Research analyst Rob Sanderson estimated. That's less than 10 percent of the roughly 4.5 million businesses with an Internet presence, leaving plenty of room for further growth, Sanderson said.

Google so far has focused on short text-based ads tied to its own search results and the content displayed on millions of Web pages each day.

To diversify, the company plans to sell more radio and print ads. Google also wants to deliver marketing messages to cell phones and computing devices in the United States, something it already does in Japan.

Online video advertising represents another potential gold mine for Google. The company is eyeing an expansion into the still-developing field with its acquisition of video-sharing pioneer YouTube Inc. for $1.65 billion.

YouTube's co-founders and other investors will be receiving their payment in Google stock--a type of currency that the company doesn't intend to use for future acquisitions. Google Chief Financial Officer George Reyes told analysts Thursday that the company will pay for future deals with its $10.4 billion cash hoard.

All that money has contributed to Google's rapid earnings growth this year. The company has collected $337 million in interest income so far this year--six times more than the same time last year.

There's little pressure for Google to return any of that cash to shareholders because the company's stock has done so well since the company's initial public offering in August 2004, Sanderson said. The stock is up by more than fivefold from its IPO price of $85.

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