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|  | AUGUST 10, 2004
 SPECIAL REPORT By Scott Kessler Putting a Value on Google, Part 2 As the eagerly awaited IPO draws near, S&P takes another, updated look at the the search giant's likely worth Back in June, we at Standard & Poor's Equity Research Services issued a special report analyzing what we believe to be the most widely anticipated initial public offering of the past few years (see BW Online, 6/11/04, "Putting a Value on Google"). Now it's August, and with the Dutch auction bidding for Google's shares about to begin (See BW Online, 8/10/04, "The A-B-Cs of Google's Auction"), the question remains: What's a reasonable estimate of Google's valuation? In the second part of our pre-IPO report, we offer our updated assessment. (Editor's Note: This article is an excerpt from the full report. Full .pdf versions of Part 2 of the Google Pre-IPO report, as well as Part 1 and the Search Engine Survey conducted for S&P, can be purchased directly at http://sandp.ecnext.com/ipo -- Adobe Acrobat is required. Additional information on Standard & Poor's pre-IPO coverage on Google can be found at http://www.standardandpoors.com/pre-ipo) The Internet search leader anticipates the offering price for its shares will be between $108 and $135. Using the 268.5 million diluted shares outstanding the company expects following its IPO, Google would have a market capitalization of $29 billion to $36 billion. And while some market commentators have remarked that the deal may represent a return to valuations reminiscent of early 2000, we believe this range is reasonable.In Part 1 of our Pre-IPO Report, we indicated that based on comparisons to Yahoo (YHOO; recent price, $26; S&P investment rank, 3 STARS, hold), Google's most comparable peer in our opinion, our preliminary estimated market value for Google was from $33 billion to $40 billion. Part 1 was focused on Google's businesses, industry, and competitive position, and included brief valuation analysis. In this report, we more thoroughly consider the company's potential value. COMPARABLE REVENUES. In our June report, we employed relative analysis involving Yahoo to derive a preliminary valuation for Google. Now, we revisit this analysis, and utilize three additional comparative methodologies as part of our assessment to determine the company's potential value. (Note that our relative analysis was done using prices as of July 27, and Internet stocks have fallen notably since then.) Updating our previous initial valuation analysis with revised estimates and ratios, we derived the same range for Google's potential market capitalization as we did in June ($33 billion to $40 billion). Following details released in late July, we are also able to derive possible per-share values of $121 of $147. Our updated 2004 forecasts for Google are revenues of $3.0 billion, gross profit of $1.5 billion, and earnings before interest, taxes, depreciation, and amortization (EBITDA) of $1.1 billion. While our estimates for gross profit and operating cash flow are largely unchanged from our June report, our revenue forecast is different. In late July, Google began reporting gross revenues instead of net revenues. We believe Google made this change so that its financials would be more comparable to those of other Internet companies. Yahoo recently traded at 12 times sales, 19 times gross profit, and 40 times EBITDA. If Google traded between a 10% discount and a 10% premium to these multiples, its aggregated valuation ranged would be $33 billion to $40 billion. Thus, although Yahoo's valuation has fallen since Part 1 of our report was published, Google's reported and estimated revenues are in effect higher, leading to the comparable valuation assessment.
Taking this analysis further, we compared Yahoo, as well as three other prominent Internet companies, Amazon.com (AMZN; $38; 3 STARS), IAC/InterActiveCorp (IACI; $27; 4 STARS, accumulate), and eBay (EBAY; $77; 5 STARS, buy), to Google. We believe Yahoo is Google's most comparable peer, primarily because both companies derive most of their revenues from online advertising. We also included three smaller companies -- Ask Jeeves (ASKJ ), FindWhat (FWHT ) and LookSmart (LOOK ), none of which is followed analytically by S&P -- focused primarily on online search. We compared Google to these large-cap and search-focused Internet companies, based on a variety of valuation criteria. Our consolidated relative analysis suggests that Google's indication of its stock pricing at $108 to $135 is reasonable, with some of our calculations suggesting potential values as low as $55 and as high as $148. Averaging the ranges derived from our four valuation methodologies yields a possible stock price of $86 to $105 (whose mid-point is $95.50). We believe that although comparative analysis offers insight as to value, intrinsic considerations are also a critical component in valuation assessment, because they allow for the inclusion of explicit growth assumptions.
BW MALL
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