The company finished the third quarter of 2007 with cash and investments totaling $14.2 Billion and working capital of $14 Billion, compared to long-term liabilities of $521 million.
Online advertising has the potential for strong growth as e-commerce expands. Broadband internet connections continue to proliferate, and users are increasingly willing to make purchases online.
Companies are also more willing to advertise online, recognizing that consumers increasingly research products on the internet, regardless of whether the purchase takes place online or in a physical store.
Advertisers are also responding to declining viewership for television commercials, as digital video recorders allow TV viewers to skip ads. Even so, internet advertising accounts for only about 6% of total ad spending in the United States, suggesting growth potential.
In addition, online advertising in international markets represents a significant growth opportunity. Indeed, only about 17% of the world�s population uses the internet, compared with about 70% in North America.
China already has a sizeable internet user base of about 132 million, but that represents a mere 7% of the country�s population. As the Internet expands further into emerging markets, online advertising could see an extended period of rapid growth.
Factoring higher long-term profit estimates into our discounted cash flow model, we now believe that fair value for Google shares is about $708, our new 12 month target price is $740. Our DCF model assumes a long-term revenue growth rate of 10% and an operating margin of 50% of net revenue.
Our target price values the shares at 35 times projected 2008 earningss and 29 times projected 2009 earnings. While these multiples are high, they are not unreasonable, in our view, given the company�s superior prospects for long term growth.