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Ambiguity Drives Google's Valuation
BreadMan writes "The Economist has an article about how Google uses its amorphous positioning to gain investor interest. At the current valuation (the P/E is north of 110) this is a winning formula, but the article questions the long-term soundness. The reporter was chagrined that the last press tour focused more on the CFO (Chief Food Officer) and the monthly pasta consumption (500 lbs) than products or financial performance of the company."
IT IS hard to know whether to be impressed, suspicious or amused.
Combine such evidence of frenzied activity with mysterious secretiveness, and the imagination is liberated. A Google web browser? A Google operating system? All the world's information? World domination? Buy, clearly.
What is so hard to understand? Google, in a relatively short time, has been able to come to market with some amazing pieces of software that are stable, useful, and free even in their "Beta" stages.
I can't say that for plenty of other companies out there with huge market value... Some of those companies released "final" products that were little more than "Alpha" quality software that we tested for them on our own dimes for 15+ years.
Google, secretive or not, is producing good software at an alarming rate (yes, alarming is the word to use here) and at this time should be invested in. While I don't write for the Economist, it's pretty obvious to me that it's not Google's "ambiguity" driving its value, it's Google's proven track record which is getting people interested.
What's a couple thousand dollar gamble for most people that might have missed Yahoo's rise to fame and fortune? Knowing what Yahoo was/is doing and how that compares to what Google is doing now shows that this might be a better bet and people are willing to sink that cash into it.
wish we had a cfo. we don even have a vending machine!
500lbs is an awful lot of pasta
Just because your paranoid doesn't really mean they aren't out to get you
Physics is nothing like religion. If it was, we'd have an easier time trying to raise money!
1. PR posted on slashdot.org frequently.
2. ???
3. Profit.
Current P/E: 121.38. Long-term P/E: 1.00. What more do you need to know?
This Article was published in the July 2nd edition of The Economist...
What about the 2.300 lbs of chicken, 1,600 lbs of coffee beans, and 112 lbs of wheatgrass(??)!
David
Perhaps that is just because deceit pays in Corporate America (if not the entire Corporate World). The whole attitude to profits before morality and social duty will of course lead to that. Those who are the best at deceivery will profit the most. Why be honest when you'll benefit far more from misleading people? And when they point out that you have mislead them, just ignore them or deny the deception. It has worked well for the American and British governments concerning their boondoggles in Iraq and Afghanistan, so it no doubt works for corporations too.
Cyric Zndovzny at your service.
Ambiguity is being internally contradictory or open to multiple different interpretations. This article doesn't seem to be pointing to Google being possibly good and evil at the same time (like Ben & Jerry's). Instead it is saying that Google is highly secretive and no clear picture can be made, much less contradictory ones.
Perhaps reporters are looking at things the wrong way. The reason for Google's success and break neck product generation pace is the people that work for them. Maybe you should be more interested in their habits if you want to know where Google is going. More to the topic of valuation though, Google is highly valued because their growth is tremendous, their has been almost no growth deceleration, and they generate huge amounts of cash. I believe they are on course to generation $1.8B in cash this year, something very, very few companies can say. Is it worth what the stock is trading for? Clearly, no one knows, but many think it is. Google's growth will start to level at some point, but the thing is that when you're growing this fast, slowing growth down only a little later (or earlier) is going to make a big difference in absolute sales or profit numbers. So, timing of the leveling off is crucial, but almost impossible to predict.
"Brand equity" represents the entire public perception of the branded product (in this case "Google" / Google's securitized equity). People think "Google" means "the next big thing" and "smart Internet entrepreneurs". So pasta consumption stories build brand equity. Which is where high PE ratios come from. Very little else can justify such high multiples, certainly not the value of forseeable future profits on such a high base stock price.
--
make install -not war
500lbs is hardly anything considering all the geeks they have working for them. Or is that just between sergey and larry?
http://www.robinsloan.com/epic/
It all makes sense after that.
Just add {In Space!} to anything.
that nobody, not even professional mutual fund managers, can consistently predict what will happen with any individual stock.
And it's absurd that an individual trying to research "fundementals" thinks that they can somehow beat the market.
Google is no different, it's a crap shoot, it's monkeys throwing dart whether you'd make money by owning it or short-selling it.
The reporter was chagrined that the last press tour focused more on the CFO (Chief Food Officer) and the monthly pasta consumption (500 lbs) than products or financial performance of the company.
I think this is also a reflection of the attitudes of the guys in charge. Google is not interested in running a corporate hell, Google is interested in producing quality services, and having a good time doing so. They're making scads upon assloads of money in the process because their formula is so attractive to most people.
what, yet another Google Post? Well, I guess that Chief Food Officer is not strong enought because he got Slashdotted. There. Got two birds with one stone.
Ambiguity is being internally contradictory or open to multiple different interpretations.
It can also mean "doubtful or uncertain".
The article is referring to the fact that Google's future and future plans are ambiguous. It is unclear what Google is going to do next, and as the article notes not entirely clear at times what they're doing now. Google gives the constant impression they're about to do something fantastic and creative, any moment now, just wait for it. However, what this implied thing will be, when it will happen, and whether it will even happen at all (though Google certainly does seem to keep following through on randomly pulling rabbits out of their hats) is ambiguous. Hence the article's choice of words.
Irritable, left-wing and possibly humorous bumper stickers and t-shirts
Stock price too high for the earnings?...come on, this is the Net age...don't you think "profit" or "earnings" might be an outdated parameter by which to judge the health of a company...oh wait....
Explain your point please.
Try one-time innovation.
Their innovation was a search engine that didn't have NASCAR ads all over it and worked on dial up lines. That's all. They did that in like 1998.
They've come up with nothing profitable since.
Nothing.
(They have come up with innovative stuff, but it's not profitable)
Google is a big sham. Their stock isn't even first class stock. It's pretend stock. The people who have bought it don't have the voting rights as the insiders. They can't even vote those clowns out of power.
Google is the last dot com scam.
Short 'em now.
because it's about one of the more interesting tech companies, which i think counts as "news for nerds" and "stuff that matters"?
The FA doesn't mention how much solient green the employees consume in an average month.
...is in the enormous database of cross referenced user activity they have been covertly collecting over the last half a decade and which they regularly hand over choice snippets of to governments across the world on request.
Google is the greatest piece of spyware ever created. It looks perfectly benign. It looks like it is there to help you but it's just there to record your life for the benefit of Google, governments and big business.
How did you come up with that?
Everybody knows that Google's expenses will be lower, being a pure technology company. It's a new era, and the old rules don't apply.
Pop! [sound of tongue removed from cheek].
Actually, I think Google's long-term stock value depends on how they spend the cash they've raised. It's the old story from the dotboom, investors are really paying Google to be their fund manager, giving them money to see who they'll buy.
I think their performance as a tech company (as opposed to their performance as a holding company) depends mostly on their ability to keep out SEO spam.
sigs, as if you care.
Whilst Google does undoubtedly make intriguing software, it remains to be seen how long this innovation can continue.
I would also question just how far they can take their existing product line, and how long they will remain safe from the other big players (e.g. MS, etc).
Google Earth, Google Maps, et al are funky little things in their own right, but they are somewhat reminiscent of applications you'd expect college students to come out with. High on technical merit, low on ROI.
Also, I think the original article was reflecting more on Googles (in)visibility rather than the strength of its product line. Perhaps Google is being intentionally misleading to analysts because it doesn't want the rigmarole of facts and financial figures to detract from the halcyon "its Google so it must by definition be grate!" (sic) public perception.
Is anyone else as sick of hearing about this as I am? I feel like thats all they ever mention. Granted, its a cool perk, but I'm not going to work for $50k less just to get some free food. As a programmer who sits at a desk all day, free food = free diabetes at age 40.
Also the stock options arn't a great motivator anymore since the stock is basically priced for where Google will be in 3-5 years. To see the same return on your Google stock issued now compared to the stock of last year, Google would have to become the size of Microsoft in market cap.
The other front-page story on Netscape highlights the promises and risks of high-flying internet companies. In this post I argue that Netscape fell because it was so easy to switch browsers, especially when getting a new computer.
I wonder if Google will be able to make itself sticky enough to survive any threats? Currently, Google doesn't really offer any intercompatibility advantages in the sense that a co-worker's use of Google does not influence my use of Google. And if I replace my PC, Google doesn't offer anything that encourages me to use Google on the new machine. (GMail is somewhat sticky, but is too independent of Google's core search to force people to stay with Google search)
In contrast, I can see how MS could offer more integrative search experience where people would use MS search tools because friends and coworkers use MS search tools. If my coworker's PC is indexed by MS, my old PC was indexed by MS, and my new PC comes with built-in local/global search tools, then I'd bet a large fraction of people will switch to MS search tool regardless of Google's marketshare. Even Google's ad-words placements on 3rd party sites could be threatened if nex-gen MS server includes integrated ad serving tools.
I hope that Google finds a way to encourage people to stay with Google even as they change PCs or interconnect with co-workers and friends. The current valuation of Google requires both high growth and low risk.
Two wrongs don't make a right, but three lefts do.
Let me offer a bit of instruction to fellow geeks.
...
One way to value a stock is to compute its future earnings, discount them and figure out its value today.
So for example, if Company X pays out $10/year, every year, how much would you pay to buy Company X today? To compute this, you do the following calculation: $10 + $10/(1+intrate) + $10/(1+intrate)^2 + $10/(1+intrate)^3 +
Intrate is the prevailing interest rate. Clearly, the company has to cough up $10 for the first year. For the second year, (if int rates are 5%), the company only has to cough up $9.52.
In this example, the value of Company X is about $210 today.
Clearly, a succesful company will be able to pay out ever growing dividends. The confidence in growth is computed down to the P/E number, price/earnings.
In GOOG's case, the P/E number is now 120!. This is an absurd number.
Comparable tech companies sport the following P/Es:
Ebay: 58
Yhoo: 58
Msft: 25
Goog: 120 (wtf?)
GOOG is probably overvalued. By a lot.
Seriously, they are playing from a stacked deck. They started the bulk of their projects before going public and have been pushing the out at a good clip.
What happens when that pipe line dries up?
They are a classic dot-com overvalued stock. It will come down and when it does it will come down hard. Expect it to happen after they make some big with stock purchase.
Really they need to start buying up other companies using their inflated stock just so they can have something long term to sit on.
They are not worth the value their stock suggests.
* Winners compare their achievements to their goals, losers compare theirs to that of others.
Such loose reasoning is why we had the dotcom bubble and crash. Has that been forgotten already?
From article
At least in part by shrewdly manufacturing a winning mystique. No outsider today can prove definitively that Google is not an office park full of geniuses who could at any moment announce, simultaneously, world peace and a cure for the common cold. That is because no outsider today can say anything definitive about Google at all. This is intentional. Google makes itself totally opaque by camouflaging itself with lots of what journalists call "colour".
Nope. This is what is called in financial circles as "risk". Sure, the company COULD do wonderful things, but we really aren't sure. Large standard deviation in potential returns.
For finance types who actually understand how valuations are done, we must take the median expected return of future cash flows, and use a present value discount rate that appropriately reflects this "risk" among other risks. If I have a $100 bond from the US Government that will mature in 3 weeks, it is worth a little bit less that $100 -- the discount rate isn't very high. If I have a $100 promise from uncle Guido due in three weeks, it is worth about 10 cents, since his word means jack -- his discount rate is virtually infinite.
In Google's case, we must use a high discount rate for several reasons.
The first is that Google really doesn't have anything that cannot be reproduced. The barriers to competition are not incredibly high, though it wold take a significant competitor. Combine this with the fact that Google could easily misstep, and lose their "do no evil" status. This bumps up the discount rate.
The second is that Google investors are basing their valuations on vague promises of what might happen in the future. Sorry. I am only 31, but have seen enough promises not pan out to make me a sceptic. A bird in the hand is worth two in the bush. Sure, we must account for their prior stellar track record. But the promise of $100 in five years is not the same as $100 in my hand now.
Should you invest in Google? That question is, in itself, ambiguous. Would I invest at $100? Yes. Would I invest at $300. Hell no.
There is a chance they will live up to their expectations. There is a chance they won't. But investors are acting like their future promises have a 100% chance of occuring.
My bet is that this "mini bubble" will burst by end of 2006.
See my journal for slashdot ID's by year. Mine created in 2005. http://slashdot.org/journal/289875/slashdot-ids-by-year
Google success has nothing to do with Q4 2005's financal statement (it has enough short-term cash), and everything to do with keeping the talented engineers it hired and keeping them motivated to outperform MSFT in the long term.
For this goal, the Chief Food Officer is infinitely more imoprtant than the Chief Financial Officer.
Google's current growth (if it is real) is not sustainable. What they are doing now by recruiting enormous amounts of staff for very spurious and disposable job titles like 'Maximizer Coordinator', 'HR Anylist' are exactly the kind of jobs that are killed at the first sign of trouble. That is if these actual positions exist at all.
You can read a lot into where companies are going by their recruitment ads what Google is going through at the moment is typically not sustainable in the long term. What is currently happening is the markets haven't quite woken up to this yet and are speculating on the direction Google seems to be headed rather than on tangible realworld assets and strategy. Google appears to see new voids to fill every day but in 99% of them there is no market to fill or exploit in those voids and what Google are delivering is more branding and service.
The other problem Google have always had is a lack of solid competition which tends to subjectively make their services look better and more user oriented than the others. It's more a case that the others are rather poor, not necessarily that Google is better.
The Sirius Cybernetic Systems Corp. is pleased to announce the release of the Ambiguity Drive to the public. The Drive allows the user to travel quickly and inexpensively across vast distances without locating precisely either the starting or ending points of any trip. The result is an easy, scenic jounrey through the galaxy with none of the inconveniences of infinite improbability.
It also works if you are lost.
The end of the world is comming!
Google is not a help center. Google's people do not make money on their own, by serving a need. Google is products, specifically Adsense. So all those 'Google people' would be useless if they didnt keep creating new products to expand the Adsense. And thats where Google's growth comes from; Adsense keeps expanding. It's not because they just released Google earth.
Recap: Google's strength is primarily Adsense, not the people it has working for it.
However great Google is its' stock price will come down. /\/\/\/\/\/\/\/
If you need someone to repeat it for you, take a look at any stock chart. It looks like this:
Did /. give any notification to Google about this story before putting it up? I swear...
1. Take 3lb coffee beans and 1 lb Pasta
2. ???
3. Eat the tasty dish you prepared in stage 2.
3. PROFIT!
In soviet russia stale jokes recycle you!
I think the article is spot on, and the reporter is not confused about anything at all - the reporter is rightly asking what the valuation of the stock is really based on - reporter notes vague handwaving, a non-committal (beta) software stream, much, much rumours, and the fact that people at google like to eat. The reporter asks - in not so many words - how and when google will start delivering on that stock price - i.e. where google's *80 billion* valuation is hidden, and how, if at any time at all, this will be capitalised.
Google's success is not at doubt, rather, the reporter draws some subtle parallels to the dotcombusts of yesteryear, and hints at potential repetition and subsequent dissapointment of those times.
People who think they know everything are a great annoyance to those of us who do.
This is the sound of me puking. Ralph
I don't mean to disagree completely, but I think those talented engineers will, in the end, care more about whether their paychecks clear and whether their stock options are worth something than whether their pasta is cooked al dente.
That Chief Financial Officer does have a thing or two to do with engineer satisfaction.
Most of the ones that matter never need to worry about a paycheck again in their life.
They stay at Google because of the culture and to interact with other top people in their fields.
This is a very important thing to know. The price of a single share of Google is irrelevent. You may only be able to buy 4 or 5 shares, but it represents a greater percentage of the company than 4 or 5 shares would of, say, Dell.
-Ted http://www.freemathhelp.com/
Throughout its life, google has been structured in a two tiered stockholding structure, Class A and B shares. One class (I think it's the A) gets to vote at board meetings, the second just gets dividends.
If you've ever worked at a startup, this is a pretty typical structure for startups. There are preferred shares, which your financers hold, and regular shares, which you as a founder/CTO/chief monkey get. What's unusual in Google's case is that its been able to not only fund itself, but go IPO, while maintaining a large percentage of founder control over the company.
If you read the IPO statements, they make a hell of a lot of statements about the inherent risk in buying google stock. Not only are you buying what the _founders_ classify as a risky investment, but you don't even get to vote on the direction of the company!
What this does though, is allow the founders to run the company in a very different structure from many other public companies. Essentially, they can take risks that at most companies, would not pass the muster of the boardroom.
Is Google overvalued? It depends on what you mean. It would be similar to asking, is it worth dropping 10K on the World Poker Championships buy-in. If you're confident enough in your ability to play poker (or be lucky), or confident enough in the ability of Google to outflank the competition in the tech world, you're set.
Otherwise, you're making a gamble. Personally, I like to gamble with odds I can control.
-- Bird in the Bush: The Renewable Energy Blog http://www.birdinthebush.org
Short it!
For those that don't know what I mean, Wikipedia has you covered.
Stocks are financial instruments. The two factors that determine the value of a stock are: Earnings & Discount Rate. Nothing else. This is what makes stock trading possible.
= m&q=l&c=
When people lose sight of the underlying financial value of a stock, who knows what they'll pay. And they'll be sorry.
Clearly, GOOG isn't eToys or Webvan or any other bogus dotcom.
The comparables I quoted are useful to measure GOOG's P/E ratio. Does GOOG qualify to be growing at a rate that is nearly 100% greater than YHOO?
Look at what happened to eBay between Jan/Feb of this year. The stock crashed because financial realities finally got the better of people:
http://finance.yahoo.com/q/bc?s=EBAY&t=1y&l=off&z
Interesting comment, since Microsoft is in the business of "Selling" software, whereas Google is in the business of "selling" web-advertising. If you haven't noticed, those are two very different businesses.
Where MS is concerned is that it's software monopoly is stagnating a bit and it wants some of the web-related business that Google has.
There are huge barriers to entry...first build a server farm, easier to do now but there is a ton of tech behind googles hardware. Second, build a user base because the pay-for-hit customers don't pay shit if you don't have a huge user base.
Face it Googles only meaningful competition at this stage is MSFT and YHOO. And google has an advantage in that its cash cow is also its main focus. Search for MSFT is an afterthought and internal politics hold up a real effort. I really think YHOO should have stuck with paid services and left the search biz to GOOG but they have the best chance, but in reality there are plenty of dollars to support two very profitable competitors as long as they never compete on price, and I don't think they do yet.
Hey biz idea for a company, reverse auction site for keywords...lol.
But you dont get the point their paycheck clear because they are happy and motivated...
Thats entreprise culture is so important to its sucess
Intentionally ambiguous?? C'mon, everyone should have realized by now that Google is an arm of the US National Security Agency.
They continually index the Web, and monitor our searches for intelligence purposes. Google mail and Google groups expand this capability substantially. And of course Google Earth allows them to monitor what IP addresses are imaging what portions of the globe.
They are fighting communism/fascism/terrorism/narcotics trafficking/internal dissent/etc. by advanced search tecnology and traffic analysis. The fact that their stock is overvalued should be looked at as a boon to the American taxpayer.
Reading these comments here all I can say is you guys are so brainwashed by the Google hype machine.
First, Google is NOT an innovator. Why not? Everything they do is a slight improvement on existing services:
- Search: Sure, it's the best search around, but it is simply an improvement over existing search services. And by now Yahoo's search is comparable. Soon there will be many equivalent search engines.
- Maps: Looks pretty, but it's just an incremental improvement over existing services. Trivial for Yahoo or anyone else to catch up.
- GMail: Nothing to see here except very good marketing. Who ever uses 1 GB of email? Nobody.
A lot of Google's services actually suck if you think about it. Froogle? Google Images? Those are a joke. And thanks for breaking Google Groups to make it unusable.
If you think Google is the greatest thing since sliced bread, take a deep breath and realize that it's just a company that is very good at marketing, and making lots of money.
Google is an advertising company, they are not a technology company. They are not true innovators like, say, Apple or Oracle. Just look at the reasons I outlined above to understand why. A true innovator ushers in a new age. Like Apple with the iPod and digital music. Or Oracle with database systems. Google hasn't ushered in a new age of anything.
Stop the hype.
Google success has nothing to do with Q4 2005's financal statement (it has enough short-term cash), and everything to do with keeping the talented engineers it hired and keeping them motivated to outperform MSFT in the long term.
Talented engineering is necessary but not even NEAR sufficient to build an actual business. As the Economist says: maybe those engineers will come up with a cure for the common cold. Or maybe they'll come up with reams and reams of perpetually-beta services that are really technically cool but make no revenue whatsoever. Google has translated cool technology into massive revenue at least twice so far: 1. with advertisments on the original search engine and 2. with contextual adwords in other people's pages. Is this really enough to prove a sustainable talent of being able to actually make money? I would say: not yet.
google doesn't sell software dude. they give it away for free. thus they don't really compete with MSFT. Also, because they don't do formal releases, instead opting for "soft" releases forever in beta, they obfuscate issues about the quality of any product other than search.
also, they engage in all of the practices that MSFT does: they find small companies with interesting pieces of software, determine how value can be added to search and then buy those companies out. It's exactly what MSFT did.
In regards to innovating, for the most part, they don't even innovate. Their one true innovation is the excellence in search, but for the most part, they enter niche markets where software companies are trying to eek cash out of products, buy them out and release the shit server side for free. Always in beta, and always for free.
Or like GMAIL, offer more for less. Here's a gig of space. Make it seem exclusive even though it's not. Better targeted ads and a group to experiment on endlessly. I often know the content of my emails by looking at the ads before I read them.
And your point about not mattering re: short term and long term investors... is that a joke? Page, Brin, and Schmidt together own about 10 billion worth of stock in a company with an 80 billion market cap. They probably don't even get called on when they raise their hands at the board meetings. You better believe that they care about quarterly earnings, especially if MSN and Yahoo start actively undercutting Google's only consistent source of revenue, which they both can afford to do.
Re: the importance of the chef. LOLOLOLOL... ummm, I don't know, dude.
un burrito me trampeó.
Most of the ones that matter never need to worry about a paycheck again in their life.
They stay at Google because of the culture and to interact with other top people in their fields.
While I don't know the intimate details of the typical Google employee's stock option portfolio, they are far from worrying about paychecks.
The typical option has a vesting schedule and most employees don't sell for a couple years (the typical schedule has been either 4 or 5 years until fully [100%] vested).
The executives and founders of the company (IIRC) have only six months (SEC regulations) to sit on their stock (since IPO). Look at the history of Google and Yahoo employees. They had to wait 4 years to 'cash-in' and Bezos and company have been cashing out for a while--not to mention cashing out when valuations were really high, not after the bust.
Now that's not to say there aren't a bunch of rich people there, but the parking lot is hardly filled with Ferraris.
Is still a dictatorship.
Whilst many engage in taunting MSFT for having too much vaporware, I submit to you that one day the Google stock experience will initiate the phrase to be coined as *Vaporstock.
*(NOT to be confused with Woodstock - You dirty hippies!)
God: When you do things right, people won't be sure you've done anything at all.
Google's extraordinarily high P/E ratio means that, at its current price, it must grow earnings astronomically (grow, not just maintain, and certainly not lose money) over the long-term in order to earn a good rate of return at the current price, relative to other stocks.
--Pat / zippy@cs.brandeis.edu
...and I say this as someone who needs to lose weight (and has never worked for google)
Free meals doesn't have to mean "free unhealthy meals". I'm guessing this is especially true in an area where the average person tends to be more health conscious than, say Houston, TX (often cited as "the fattest city in America"). You don't need to eat a burger and fries for lunch every day, and maybe, just maybe you might find you feel better with an improved diet.
But yes, them fries is damn tasty.
I'll create an amusing sig when I have something meaningful to post.
If google did a massive number of stock splits so your $2,000 bought 10,000,000 shares, would that make you more happy? Then the stock price would be $0.0001 a share (Im not doing the math here) and you could buy buy buy...
... What if there was only 30 outstanding shares in a company, you would own 1/3rd.
Then again, you would be buying 0.000000000000001% (not doing the math here) of the company and the price would only move 1 cent every year.
NUMBER OF SHARES MEANS NOTHING, its all about percentage of the company.
Saying you can only buy 10 shares means nothing,
Modesty is one of life's greatest attributes
Does anyone else remember the glory days of Netscape when they had a private on-site sushi bar, full time masseuses, and a nose-bleed P/E ratio? I do not own any Google shares right now, but if I did I would sell them after reading something like this, or in the words of Joseph Kennedy, "When the shoeshine boy starts giving you tips, it is time to get out of the market."
It is relatively easy to get behind all the hype, if one wants to. The problem is that reporters find it easier and more fun to report on or better yet create hype. You get a free trip to the cafeteria rather than sore fingers slaving at the keyboard or sore ears working the phones.
How you ask? Statistical sampling of their posted advertisements. It is relatively easy to set up a bot to count new adds, monitor ad persistence, and obtain rates of return (they provide rates for all advertisers so they can pay for their ads). One can then categorize results associated with "new technologies" and compare both dynamics and rates of return on investment.
When one does this the results suggest that income is growing at a rate to support the stock at about $45-50/share in the long term, minus the hype. But its the hype (greed?) that stimulates most investors, so what do facts matter? So what else is new?
Think of RedHat stock... I remember when it was trading for > $100. Now look where it is. at $15, the PE ratio is still waaay high.
Stock price, though it should be a product of value and perception, is nearly completely perception, especially nowadays, though you would think investors would have learned from the dot com bust. People believe what they want to believe, I guess....
THe problem now, though is that even if google stays on par and meets earnings estimates, stock price growth could very easily just go sideways, in which case a savings account would have been a better investment. They could split the stock, but still then, the PE ratio is still alarming and that doesn't change the overvaluation of the company.
If I were a stock owner (unfortunately not one) - I'd sell now.
'Fraid I'd have to disagree with you on that. They have some very smart people there, and "search" is actually an immensely broad task with lots of different requirements. http://sourceforge.net/projects/goog-sparsehash/, a library they've open-sourced, is immensely useful, and I'm sure there's lots of even more interesting code they're keeping under wraps.
I participated in the Google IPO because I figured they'd do good things with the money. So far, I think their choices in purchasing have been excellent, and I consider it well-spent. I don't think I'd buy any more stock at its current valuation, but I'm also hesitant to sell.
To an investor a stock may as well be a baked potato. Stock prices are based solely on perceptions: it is not about what the company is actualy worth but how other investors feel about the longevity of the brand and how much are they willing to pay to add that brand to their portfolio.
Compare the cost of Picasso's art supplies to the average auction price of his works... or the cost of designer label suit to the cost of materials plus sweatshop labor... it's all about perception and how much people are willing to pay.
Google is still in a honeymoon period with the market, it's a new yet well known brand untainted by scandals, perceived as having longevity.
http://hussmanfunds.com/wmc/wmc050613.htm
http://hussmanfunds.com/wmc/wmc050620.htm
My paraphrase:
Google is being priced at a growth stock but in terms of market capitalization, it is half again as valuble as Yahoo, more than 4 times as valuble as Amazon, twice the value of EBay, and almost a third as valuble as Microsoft. Even if Google were to become the next Microsoft, the return on investment would not be exceptional. When even the most optimistic assumptions result in unexceptional returns, a wise investor stays away.
Martin
Never before have I wanted a corporate entity to achieve world domination.
I've generally found that however good slashdot is for tech information, if I based investing information on what I've heard on this board I would be broke. I would have shortsold MS and SCO and sunk my money into Red Hat among other things.
Unfortunately, the responses here are so ambiguous, I don't know who to disbelieve.
___
It's the end of my comment as I know it and I feel fine.
I don't disagree with you on the intelligence of their staff. That's exactly my point. Their staff is strong enough to not be interested in reinventing the wheel. They assess the marketplace, and incorporate smart work with cash. That's an immensely smart thing to do. I for one, am not a person who bashes this practice as one that stifles creativity. I think it boosts innovation because small companies can look to big companies as end of the line consumers even if they haven't figured out a way to bring their product to market successfully. Let's face it, a lot of small software are great little tools that are not supported in the consumer marketplace. Smart companies like MSFT and Google and others incorporate them into already existing offerings at no additional or marginal cost to the consumer.
My point is that many look at Google and MSFT as diametrically opposed corporate entities. I contend that they use similar, if not identical, strategies to expand their business.
The point of the article and ensuing discussion is that none of these ideas and extensions to the core business have yet to yield any significant results to the bottom line. That is potentially injurious to Google as a public company, and to the tech sector it now tentpoles.
I'm actually confused as to what you disagree with me on.
un burrito me trampeó.
Ambigious? Inquirers shown bread and circuses?
Anyone remember any other company like this?
I think the article is spot on, and the reporter is not confused about anything at all...
Of course, your username is "passthecrackpipe"
If at any point Google announced to the world, "Hey look, we now have the largest collection of the most talented software engineers in the world. We have control over a very important and difficult to develop function that can be at the heart of every computer system in the future. By leveraging our presence across all OS platforms and across international borders, we believe that distributed computer and information access over the internet will render OSes into a low margin commodities market like hard drives and memory chips. Our plan of attack is to..." ...then Microsoft will surely take notice and turn their entire battleship towards Google and crush them as they did Netscape.
If, instead, they periodically leak many potential products for users in a beta program, each of which has revolutionary and potentially devastating implications for Microsoft, then Microsoft cannot bring to bear all of its laser-like competitive powers against those betas as they could against a concrete, real product strategy.
If, instead, Google gathers user feedback from their betas, and quietly works on improving the successes, they can release a product that has features that are difficult for even Microsoft to copy and compete on quality, and has very high user satisfaction. Then they can leverage the networking effect of positive word of mouth from users in their beta program to establish a very loyal and large satisfied user base before Microsoft even gets an inkling of what they're up to.
Google, like Netscape before it, has the *potential* to change how we use computers in the future. This is contrary to Microsoft's best interests. However, because Google is not in direct competition with Microsoft, but rather can grow around, and eventually subsume desktop functions, it is very difficult for Microsoft to directly attack Google. If, on the other hand, Google has clearly laid plans of attack, and product and profit plans clearly marked, then Microsoft can herald considerable force in a short amount of time to directly compete against whatever business model they have laid out, whether it's profitable or not.
Think of Microsoft as the Redcoats in Redmond. They have a very good regular army and have won every war they have been in. If you announce that you have an army and assemble one as such, they will assemble a larger one and destroy it. If, however, you use guerilla tactics and maintain an information network that is more aware of their position and movements than they are of yours, then you can win the war with even an inferior force.
Not that Google has an inferior force, but even with its high valuation, they would be hard pressed to win any war where dollars were being attritioned.
As of right now, some people here are questioning how Google could be profitable. Well, while looking around here, I was reminded when Google when down due to a DNS error and how many people were running around like chickens with their heads cut off. I realized that not only has Google gotten immense usage, but have become vital to everyday life. That being said, what they could do is do more of what they have been doing: licensing their APIs for commercial use. If you consider the fact that they have been known for the most part being not only stable but well known, a product with "Google Inside" might get better recognition than something built by another. As of right now, they are building their company. I'm betting it will not be long till we see products using the Google APIs for commercial use. Consider that the landscape of computing is changing from static to dynamic and from PC to set top boxes. So, while none of Google innovations seem profitable in the short term, looking further out into the apparent trend in the way people use computers could show how Google will make some money and become profitable well into the future.
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The Google bubble, like any bubble, is unsutainable and at some point the stock will retreat to realistic levels, and maybe even fall below Google's intrinsic value by disenchanted investors. That's when I'll buy GOOG.
Have fun: Join D.N.A. (National Dyslexics Association)
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Everytime there is a "new speak" on "new type of economy" that "trascends" everyone and everything, and it is DIFFERENT it makes me worry.
Make all excuses because it makes you all nice and fuzzy enside about your pokemon Googli, but even Icarus can't escape reality.
Saying you can only buy 10 shares means nothing, ... What if there was only 30 outstanding shares in a company, you would own 1/3rd.
OK, maybe you were making an extreme example, but if a $30bn company had only 30 shares outstanding each share would be valued at $1bn. Under today's conditions, that would make the market illiquid and looking at prices, price/earnings ratios, volume, volatility, or relative performance near worthless.
Actually, P/E (along with implied earnings growth, dividend (earning) discount models, etc) only makes a difference to a fundamental investor. A momentum or technical (technical analysis surely uses technical in the loosest sense of the word) driven investor looks at the price and ignores fundamentals, and some of them consistently outperform just as 84% of stock pickers in the US underperform (that much quoted statistic); infact those 'outperforming' long term stock pickers that exist actually underperform when analysed in risk-return space (i.e. adjusting returns to volatility, volatility being costly in the sense that the time you actually want your money back it is +/- the average valuation you desired using average return projections), rather than return only space.
The problem is, markets often fail to obey ex-ante fundamentals, let along ex-post ones. Some people like to take the ride and believe they can jump off sooner, all fair play.
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Did you not know that Microsoft is all over Google like a bad suit? That would seem to me to be the biggest barrier there is - you have to beat Microsoft before you can even start to try and beat Google!
Microsoft is the sea monster in Googles already massive moat. Who would be stupid enough to try and cross?
"There is more worth loving than we have strength to love." - Brian Jay Stanley
There is also an adjusted P/E ratio where you don't take into account E alone, you take into acount E and the current growth rate of E. With that taken into account Google is actually quite reasonable because they already are growing astronomically. The question is can they keep it up. I'm not so sure; I guess we'll all have to see.
--
WHO ATE MY BREAKFAST PANTS?
I wouldn't have put it quite that way, but I agree. For me, a major problem is that cheap food is bad for you, and healthy food (which I would really prefer! fish! veggies!) is expensive. If it were free, I would eat healthy way more often.
Yes, I understand the need to have happy engineers.
The point still stands that the Chief Financial Officer is basically in charge of making sure GOOG has enough cash "in the bank" to write paychecks, and write checks to the network providers, hardware vendors, office decorators, and the pasta man, as well, because most of the world does not accept unvested stock options in return for goods and services.
If the CFO fails in that responsibility, the lights turn off. Even the happiest engineer needs his network bill paid in order to get his work done.
Now, GOOG is, at least at this point, profitable, so the CFO job is not as hard as it might be. But lots of dot com companies found out the hard way that the cash spigot can turn off darn fast, and Aeron chairs don't have much of a resale value.
I know people on Slashdot like to dismiss these people as empty suits; in reality, like the electric company, they only appear to be superfluous when they do their job well.
Let's say Google has won the on-line ad business. How will they get more revenue? They can: 1) get more companies to advertise, 2) charge more to existing customers, or 3) introduce new services that make money and have high and growing earnings.
Bringing out the Chief Food Officer answers none of these questions. It is this that the Economist takes issue with. They expect a company to tell its stockholders something about the company intends to continue its growth. "We have great food" is not an answer.
--Pat / zippy@cs.brandeis.edu
Interesting that Slashdot should feature this article, roughly 4 weeks after I posted something similar (albeit with less information and more deliberations):o w-what-we-know-about.html/
http://agsharad.blogspot.com/2005/06/how-do-we-kn
Warm regards,
Sharad Agarwal
AlcoHaul: We lift spirits!
I don't think I'd buy any more stock at its current valuation, but I'm also hesitant to sell.
This is what The Economist is getting at (not just the reporter, The Economist eschews bylines for a reason). You don't have to suggest Google is anything but an excellantly run company to question whether it is worth $80 billion. While Google's advertising business is very profitable, it faces fierce competion in the upcoming years and it doesn't come close to generating the $4-5 billion in annual profits needed to justify the compan's current valuation.
i forget
The reporter is missing the point and Google is correct that thier culture (of which the CFO is but one case study) is much more important than the current quarter's results.
This sounds nice. It also sounds like Enron.
Absolutely true. Anyone who thinks that some $/share is cheap or expensive without understanding total valuation is not going to last long in the stock market. The bigger challenge is figuring out what a share buys in terms of future returns.
Actually, Yahoo's revenues are growing faster than Google's. Earnings growth is a total red herring in fast-growing companies because its the difference of costs and revenues. In a young company its easy for these to flucuate and for the difference to gyrate madly (a zillion percent earning growth may mean nothing is the baseline was near zero). EBITDA is even worse because it subtracts numbers such as taxes, depreciation, and amortization that do come out of the company when it has matured. Because YHOO and GOOG are in much the same industry, they should have similar margins once they stabilize. Yet GOOG price/sales ratio is nearly twice that of YHOO's (21.88 vs. 12.85) suggesting that GOOG's margins need to be twice that of YHOOs to make up the difference. And if you care about it, YHOO has 4 times the cashflow of GOOG (although this number is hard to interpret in a rapidly expanding companies).
You are very perceptive to estimate the total cap of shorted stock. But I'd be careful about reading too much into the short ratios because shorters consider more than just the long-term future value of the stock in shorting. GOOG is currently a daring. If it is in a bubble, then shorters will avoid it even if they know that GOOG is horribly overvalued. Short sellers have a fixed maximum gain (i.e., when the stock goes to 0) but unlimited potential loss (e.g., if the stock double, triples, etc. in value). Because bubbles have a nasty habit of being unpredictable -- nobody knows when GOOG will hit the wall -- shorters will avoid GOOG. In contrast, YHOO has been through the dot-bomb ringer and that will make bulls more cautious and the bears more agressive. Short sellers know that YHOO is less likely to be caught up in a prolonged mania phase. The point, both GOOG and YHOO may have
Two wrongs don't make a right, but three lefts do.
"has been able to come to market with some amazing pieces of software that are stable, useful, and free even in their "Beta" stages."
No, they haven't.
They've come up with a couple pieces of software on their own servers that they can't "sell". Their own indexing engine product is hopelessly outdated by 2 years. They give away an indexing tool and an anemic photo tool.
I like google as a search engine, but beyond that, there's no beef there.
Of course "ambiguity drives Google's valuation". Ambiguity drives the valuation of every stock due to imperfect information about the company in question.
One thing I notice about Google is how they have pretty much locked the everyman from buying them and gaining any of these fantastic gains they've seen in their first year being public.
To start with there's the dutch auction and the financial requirements one had to meet to be a part of it, pretty much the only people able to get involved were the financial powerhouses. But look at Google's price today: $330.89. Then look at other tech stocks: Microsoft: $25.79, Apple: $40.79 (after a stock split when it was pushing $80), Intel: $27.88, Yahoo: $36.86. Google's share price has skyrocketed, but they haven't even mentioned the possibility of splitting. This puts the entry price of Google much higher than other stocks, making it out of reach for small investors.
They will have too much money to manage properly. I predict google fallout in 5 years.
---- Berlin Brown http://www.newspiritcompany.
http://www.fuckedgoogle.com/