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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.
Current P/E: 121.38. Long-term P/E: 1.00. What more do you need to know?
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.
500lbs is hardly anything considering all the geeks they have working for them. Or is that just between sergey and larry?
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.
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....
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.
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.
if you're going to rant, at least get the details right.
Google's innovation was in using linking pages to rank the search results, not in providing a page that was ad-free.
I have no idea whether that is supposed to be a joke, or if you are actually living back in 1998. I suppose that an automated advertising service whose gross margins are as close to 100% as you can physically get is not at all profitable. Or that Google's profits are larger than Time-Warners means that nothing that they make is profitable. On the contrary: Google uses its simple, old technology as a massive cash-cow, that coupled with its killing in selling stock, is funding the development of "un-profitable" innovations. Except that those innovations are profitable. How can they be profitable if they are free as in beer? Because in Google's revenue model, the end user is NOT the customer. The sheer mass of end users is what makes Google so attractive to the customer: companies who need to advertise. Google's innovations expose end users to Google's customers more and more because end users use Google's nifty, useful innovations.
It has been a nervous year, with people beginning to feel like Christian Scientists with appendicitis.
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/
This is the old business model, one that has shown to be successful in the short-term but I believe ultimately is doomed to failure.
Customers like choice. Customers hate to be bullied into using something, and even worse resent using something only to find out that they are locked in and didn't realize it.
In the big IM boom there was ICQ, then MSN, Yahoo, etc. But people found that they had some friends on one, and some friends on the other, so they would install both. However some programmers ran into this and figured out how to write their own IM clients that allowed you to act as one, both or whole slew of IM clients as well as adding features.
Microsoft also recently got in trouble for 'bundling' their browser with their OS, and not making it easy to change the default. Which is what you are suggesting.
The last thing people at google want to do is lock people into some proprietary search engine. They want the public to have the freedom to switch. Why? Because they are convinced that they offer the best service.
If you offer the best service then you don't need to lock customers into your solution.
And keeping it the best service is what their search index updates, and PageRank tuning is all about.
Theres also another way to look at this. P/E is defined as "a stock's market capitalization divided by its after-tax earnings over a 12-month period, usually the trailing period but occasionally the current or forward period." (investorwords.com)
Thus, we can think of it as such- how many years would it take Google to buy back all of their outstanding shares at the current market price assuming their earnings stay fixed? Right now the answer to that question is 120 years. Do you honestly believe GOOG will exist in 120 years?
Of course, this argument assumes their growth stops and doesnt decline. YMMV. Thats why the parent poster's comparisons to similar tech companies is so poignant. During the "pop" of the internet bubble, companies with P/E of over 70 suddenly lost as much as 97% of their value (assuming they survived at all). GOOG is closer to double that.
Innovation, nor expertise is driving GOOG up. It's 100% pure unadulterated hype. A P/E of 120 indicates a massive market inefficiency. Unfortunately for the good people of Google and its investors, the market has a nasty way of correcting itself, eventually but never-the-less inevitably. The real losers of the Dot-com days were the investors who fooled themselves into believing that rule didn't apply to them.
They've come up with nothing profitable since.
And yet...I've been using Google for web searching almost exclusively since 1998. I have vague memories of using Yahoo! and AltaVista for a while, but I've been using Google's product consistently for seven years. In technology terms, I might as well just say forever.
Even if we assume that nothing they've released or are developing will ever be profitable at any point the future, they've still managed to make gobs of money and stay on top of the search engine market since they launched Google Search. How can they be a successful and profitable company year over year with only one or two products that undergo only iterative refinement? Ask Microsoft. (It is true that Google doesn't enjoy the benefits of format lock-in that Microsoft has, but Google does have a product that a) doesn't suck, and b) isn't evil.)
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.
Although it obviously doesn't sit right with you, the 'benevolent dictatorship' model of governance seems to be quite acceptable to a lot of people. Owners of Google stock are saying, "We trust these guys to manage the company--and our money--and quite frankly we like their philosophy of not chasing quarterly financial targets or jumping to the tune of large institutional shareholders." Who do you trust more to run Google--a mob of shareholders, or the guys who built the company? A lot of people seem to be quite willing to put some faith in "those clowns".
~Idarubicin
"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."
This same structure also allows the company to focus on long-term growth, instead of having to worry about frequent changes in power due to shortsighted investors. It's the best of both worlds, IMO...a publicly traded company that's managed like a privately held one.
Bill Clinton: Pimp we can believe in. - The Shirt!!!
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.
This approach of measuring corporate valuations is called FCF (Free Cash Flows), and should be based upon free cash flows, not on dividends. It is very commonly used in the investment community, and shows a *much* higher confidence factor when compared to actual valuations than either trailing or leading P/E valuations.
Looking at http://finance.yahoo.com/q/ae?s=GOOG we can see that Google currently has a trailing P/E of about 121, but a forward P/E of around 46. That forward P/E really is not too outrageous for a company in a high-growth phase.
Take a look at the FCF calculations and you can see that Google may even be undervalued, depending on your estimates of future growth and profitability. Google has shown fairly consistent gross profit margins, and improving operating profit margins as they have grown. Furthermore, they are showing a growth rate of >40% per year in revenue. If they can maintain that for 3 years, then reach a steady state in growth & profit margins, their $300+ stock price is actually fairly valued. If they can exceed that growth, sustain the growth for longer than 3 years, or improve their profit margins, then an even higher stock price is warranted. Remember, stock valuations aren't based upon what the company did in the past, but what investors think will happen in the future.
Given that, I think everyone here has missed the boat. Their search engine is wonderful, and drives a lot of their business. But remember that ad sales from their search engine accounts for only about 1/2 of their revenue. The other 1/2 comes from Ad-sense selling to other websites. If Microsoft releases a magical search engine that manages to steal 100% of Google's search engine business, Google still would only lose 1/2 of their revenue. Based on their profit margins, I would bet they would be able to remain profitable in the event of such a change, too.
Google is an advertising company. They make money by driving traffic to their (free) web sites, and by selling their superior ad technology to other websites. For all that everyone may hold Google's search engine technology in high esteem, their targeted advertising is equally impressive. Combine this with the multitude of data streams they have to collect information about the visitors to theirs and other websites that use AdSense, and they have a killer product that cannot be matched easily by any of their competitors.
$300 is a fair valuation. Anyone using P/E ratios to demonstrate that a company is either over- or under-valued is, imho, a moron. P/E ratios don't capture growth rates, and don't reflect the amount of free cash flow a company can generate. In the end, it is free cash flow (and not profits) that drive a company's worth. It is very difficult to "cook the books" with respect to cash flows, also, so FCF valuations will be more immune to Enron-esque bookkeeping, too. Don't believe me? Look at the FCF generated by Enron in 1996-2000. The writing was on the wall then. And, the writing is on the wall now with Google. Google is a sound company with a killer business plan. Furthermore, they have an excellent record at execution that I believe indicates they will be able to sustain their growth for a long time to come.
--Be human.
I don't take stock advice from ACs and frankly, neither should anyone on /.
Dramatically changing your behavior to meet the whims of a mob of insane speculators seems a sure path to speedy doom...
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.
So what happens with Google starts dropping location and context sensitive ads next to the google maps everyone is now putting all over the 'net because of the open APIs?
I think the people at Google who are doing this are smarter than 99% of the people on here, and know EXACTLY what they're doing.
Whats funny is the two examples you used are probably the most obvious areas of targeted future growth for them right now.
The odds are the ROI on the Maps technology will be HUGE.