Google surges past eBay as valuation debate rages

NEW YORK - Google Inc overtook eBay Inc as the biggest internet company in terms of stock market value on Wednesday (US time) after posting strong quarterly earnings, but some investors remain leery of whether the shares are worth the price.

Google, the leading Web search company, now has a stock market value of about US$56 billion ($79 billion), making it almost as large as media conglomerate Walt Disney Co and bigger than industrial stalwarts General Motors Corp and Alcoa combined.

eBay, by comparison, has a stock market value of about US$52 billion after its stock sank recently when the online marketplace failed to top Wall Street's lofty profit estimates and 2005 forecasts.

Shares of Google rose as high as US$216.80, a new record, before settling back to close on Nasdaq at US$205.96, a 7.3 per cent gain for the day.

Several industry analysts raised their price targets on Google, with ThinkEquity analyst John Tinker expecting shares to hit US$290 within 12 months. But some money managers said that while Google's profit and revenue gains are impressive, the stock is much too expensive for their tastes.

"Frankly looking at Google from a value orientation is about impossible," said Brian Barish, president of investment firm Cambiar Investors, which has about US$3.6 billion under management.

"There are some situations where you say that's just too rich for my blood," he said. "That's the situation we find ourselves in with Google. "

Google has a price-to-earnings ratio of just over 60 based on full-year 2005 net earnings estimates, more than three times that of the components of the Standard & Poor's 500 index.

Michael Sutton, chief investment officer at Liberty Ridge Capital, a money management firm that owns Google shares, said the stock is still a must-own in the internet sector despite its lofty valuation.

"If you're going to buy Yahoo, Google, eBay, you're probably not too valuation sensitive," said Sutton, whose firm manages about US$3.5 billion. "You just recognize the magnitude of the opportunity that these companies have. "

Google, which went public in mid-August, soared past analyst forecasts on Tuesday with fourth-quarter earnings that were seven times higher than year-earlier results.

Internet advertising fuels virtually all of the company's revenue. A forecast by research firm TNS Media Intelligence/CMR released on Wednesday called for online advertising to rise 11 per cent this year, a much faster rate than that expected from traditional network television, radio and newspapers.

Google options volume was intense on Wednesday.

"The reason behind it is the outlandish move in the stock today. It is a combination of short covering and true believers buying call options on the belief that Google will continue to amaze and reward," said Jon Najarian, chief market strategist at PTI Securities.com, an online options and securities firm in Chicago.

An equity call gives the buyer the right to buy the stock at a predetermined price within a set period of time.

Zachary Karabell, a portfolio manager at Fred Alger Management, which invests in Google stock, said that the company is going to trade at a higher valuation than most other stocks because of its fast growth. The company on Tuesday posted fourth-quarter revenue that more than doubled to more than US$1 billion, well above analysts' targets.

Still, he said, investors should not ignore valuation altogether, he said.

"To Google's credit, they have delivered results in excess of what people were expecting." Karabell said. But, referring to the valuation debate, "I don't expect this question to go away," he said.

- REUTERS