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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."
This Article was published in the July 2nd edition of The Economist...
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
Ok for their P/E to be 1.0 their stock price would have to NEVER change from where it is now, and they would have to start making Microsoft dollars
The current FORWARD P/E on Google is still 45. Personally I think earnings will be lower this quarter because of so many aquisitions, and multimillion dollar $0 options the senior execs have taken.
No. P/E is the stock price divided by earnings.
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.
Price/Earnings ratio.
"The price per share (numerator) is the market price of a single share of the stock. The Earnings per share (denominator) is the Net income of the company for the most recent 12 month period, divided by number of shares outstanding." - Wikipedia article.
Hopefully you're making $125k/yr now then, because Google's been hiring fresh out of my college at $75k/yr. You're not giving anything up to work for them.
P/E ratio and other metric used to relate the stock price to financial performance may seem "insane." But the price itself doesn't matter.
FYI -- harry potter spoilers link.
What changed under Obama? Nothing Good
Yes, profit. If you recall Google was completely privately held since 1998 til about their recent IPO. Why? Because that's when the owners decided the value was fully generated, and it can no longer grow, or (gasp) even fall. Time to dump and get cash while it's hot. For all the wonder that Google is - and many thanks to its precious inventors, you are forever in our hearts - it's core technology is severely limited, because it's based on a centralized system, and there is something better on the horizon. The real answer is distributed computing, where you can locally do the indexing and only send up the index, but this means giving up control, thus giving up sharevalue. I wonder how long will it be possible for this next wonder-genie be kept tight in a bottle. It could be quite sometime til the cork is pulled - a few thousand years? - but sooner or later it happens.
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.
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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
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.
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."
I should also mention that if you don't like Google's webmail, don't use it. Gmail can also be done over SSL-encrypted POP and SMTP.