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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.
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.
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.
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.