Activist: Why Google Cares About GeoEye

From a valuation perspective, GeoEye is compelling. The stock closed Wednesday at $26.31. Assuming the company returns in 2009 to its revenue run rate of six months ago, GeoEye is trading at 5.2 times 2009 earnings. BCC Research estimates that GeoEye's industry market is increasing from $1.9 billion this year to $3.2 billion by 2012. With that type of growth rate, a valuation of 12-15 times 2009 earnings is more than justified for GeoEye today, which would put shares at $60-$76.

The largest risk facing GeoEye -- and weighing on the stock -- had been the prospect of an unsuccessful launch of GeoEye-1 last Saturday. That risk is now past. In 30-45 days, GeoEye's largest customer, the National Geospatial-Intelligence Agency for the U.S. government, will sign off on the quality of the first images and start to place orders with the company.

The Google Factor

All of these valuation assumptions don't take into account that GeoEye announced, just days prior to the launch, that it would provide images from GeoEye-1 to Google exclusive of other online portals. The company has yet to give financial details of the arrangement, but Google clearly cares about GeoEye, as the attendance of the founders at launch confirm.

GeoEye is strategic to Google from a couple of angles. First, GeoEye will provide images to Google Earth and Google Maps. More importantly, GeoEye is intimately tied with Google's plans for Android, the mobile operating system it will roll out to handset providers later next year. Google is effectively buying proprietary mapping technology from GeoEye that can be later integrated into new location-based services we have not yet seen.