Bloomberg tries to draw a bead on Google's IPO valuation, but comes up with more questions than answers.

The day after Google Inc. filed plans to sell shares to the public, Internet analyst Martin Pyykkonen estimated the company's market value at as much as $25 billion. On Wednesday, he revised that to as much as $50 billion.

If there's any consensus, it's that a rational valuation is about $17B, but that crazed Google IPO fans will bid that up to $30B or $50B, vastly overvaluing the company and risking a mini bubble that will be deflated once reality sets in. But the analysts also say they don't have enough information to value Google yet.

Analysts usually estimate market capitalization of companies planning to offer shares to the public by multiplying the expected earnings by the price-to-earnings [P/E] ratio of a competitor.

Yahoo's P/E ratio (projected for 2004) is about 80, and is 118 for 2003. This is much higher than most companies. General Electric has a P/E of 19, Microsoft is 38, and Oracle is 24. Google earned $100M last year, so multiplying by Yahoo's P/E of 118 gives us an $11B or $12B valuation.

Will Google's revenues and earnings grow faster than Yahoo? How much faster may determine how much of a premium to pay for Google over Yahoo. One analyst quoted in the Bloomberg story says, "Google is growing so fast that it may earn $1.50 to $2.00 a share this year, depending on its tax rate. Multiply that by 80, roughly Yahoo's price to earnings ratio [for 2004]," and you get a possible valuation in the $40B to $50B range.

The big gamble for investors is that the Google IPO may be bid up in an auction gone wild to levels far above the company's fundamental value. "Calabrese, an analyst at independent research firm Argus Research in New York, said investors probably will pay more for Google than the company is worth....It's tough to come up with a valuation at $15 billion to $17 billion at most, and that's really stretching the numbers...The market is likely to value this thing much higher than the ongoing business would suggest."

One analyst said the Google stock offering was a "trap," and that investors should "refrain from buying shares in the initial offering and purchase them only after the frenzy has passed and the stock has declined."

See the posting yesterday about other considerations that could justify a larger valuation.