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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."
Couple thousand? That's less than 10 shares at current valuations. Google may be a good company with good products, but there is nothing realy to justify the insane price their stock is selling for. Its turned into a giant Ponzi scheme that will end up with a lot of money going down the toilet, which could potentially bring a lot of other things down with it too.
My other car is a Popemobile
"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.
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make install -not war
http://www.robinsloan.com/epic/
It all makes sense after that.
Just add {In Space!} to anything.
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.
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.
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.
Excuse me, but webmail is perhaps the dominant form of e-mail addresses these days for consumers (obviously not businesses). Just looking at the numbers, people don't want to be stuck with their ISP's e-mail address because if they change ISPs, they lose their address. They can make money via targetted advertising that they do by reading your e-mail (even if only by automated processes).
Do you ask how newspapers, magazines, etc. will make money in 10 years? You might, but then again, it's pretty much guranteed that they'll be around in some form and still using advertisements as their moneymaker. Subscribers do not make them a significant amount of cash. This is the same as Google. Yahoo's paid for e-mail users can't be that many, and the advertisements that they sell may be worth a lot more.
I think Google's overvalued, and it would be very risky to invest. However, it's not like they're overvalued based on absolutely nothing. They are making money, and their business model is just like any media powerhouse.
Perhaps you don't care, but millions of people do. There are really two "classes" of email account out there. There's personal email, and there's corporate email. In the realm of personal email, webmail is the "in" thing, and will only become moreso. That's because with webmail, it's easy to change your address, make new accounts, and to keep your email alive through ISP changes, computer replacements/upgrades, and even physical moves across the country which might entail both. It gives you a floating identity out in the ether which you can always access so long as you can find a functioning web browser. You don't have to lug your laptop to a friend's place or to the cafe, just use a random machine with a browser to get your mail.
I know exactly how they'll be making enormous gobs of money in ten years. They'll have most of the first-world by the throat, in total depedence on Google Magic for their day-to-day needs related to the flow of information. Search, email, blogs, photos, video, mapping, satellite data, filtering, secure remote storage, etc. Just as the first-world has become entrenched in web culture and dependent on it, they will become entrenched in Google culture and come to depend on it as well. They're taking a pragmatic peicemeal approach to the age-old plan of replacing your operating system with something in a browser - what Netscape had hoped for so long ago (and fittingly, Firefox will help Google too). Eventually whatevfer your home computing device is (PC, game console, media center, or some hybrid thereof), all that will matter is that it has a fast net connection and a browser, and while the large content may come from varying places, the small content, the metadata, and the glue that links it all together will come from Google.
You say the customer can't be locked in to these free standards-based tools, and that's true. But with the minds they have employed at Google, the infrastructure and highly-prized domain-specific knowledge they've built up, and their brand name, good luck to any company that wants to overtake them at their own game. It's Google's game to lose, and it's pretty unlikely that they'll lose it in the next decade.
11*43+456^2
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.
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.
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.
Google is no longer beholden to their owners who were ok with pulling in several hundred million in profit. Guys who managed a business culture and direction because it's THEIR reputation as owners. Now it's been sold to the public and it is beholden to their shareholders. Shareholders care about only one thing with a newer company, growth. They are now a growth stock.
What does that really mean? Well, for one they can't get away with turning 300 million profit in to 305 million the following year while hiring a bunch of people, giving raises, philathropy and all that good stuff. They are now measured quarter by quarter. The profit doesn't mean squat in comparison to revenue growth. Grow, grow, grow and then grow some more. Grow those revenues to give the company as a whole more value and investors buy, stock goes up. Your profits were increased by .05% for the quarter? Who cares, you grew! It doesn't matter if you did so without regard to expenses, it doesn't matter if you did so without regard to long term health of the company. Great, you grew 10% this quarter! Thank you Google board of directors! Now, what are you going to do for us next quarter? If you did 10% then surely you can do 10.5% next quarter. And you know what we'll do when you hit 10% instead of 10.5? We will say you didn't meet investors expectations and you stock will sink 2%. Again, we don't give a rat's butt you made an extra 200 million in profit because you discovered a new and innovative way to market/develope a core product. Who do you think we are? That's right, we are stockholders and you are a number on my web ticker and my number 4 horse in the race that Jimmy down at the stables told me about. Get back to work and grow.
Don't kid yourselves, Google entered that corporate hell as soon as the owners decieded to cash it in.
Face it Googles only meaningful competition at this stage is MSFT and...
You can pretty much stop right there. The corporate graveyard is stacked with companies who considered themselves competitors to Microsoft. As soon as the boys in Redmond agree that you are competing with them, they will pour billions of dollars into assuring your destruction.
In your effort to make a case for a rosy future for Google, you just made the best argument I've seen yet for their inevitable doom.
Information wants to be anthropomorphized.
Another route might be to buy put options on the stock. You are more likely to lose your money, but you can invest a lot less of it and still get nearly the same bang for your buck if the stock really does drop in price. Your potential loss is also limited to the amount you invested.
In spite of these advantages you should treat options like any other investment: you shouldn't buy it if you don't understand it.
Not all random numbers are created equally.
...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.
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
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.