Slashdot Mirror
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!
Current P/E: 121.38. Long-term P/E: 1.00. What more do you need to know?
What about the 2.300 lbs of chicken, 1,600 lbs of coffee beans, and 112 lbs of wheatgrass(??)!
David
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.
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....
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.
The FA doesn't mention how much solient green the employees consume in an average month.
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.
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.
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.
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.
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/
It could be quite sometime til the cork is pulled - a few thousand years? - but sooner or later it happens.
That's like 3 weeks in Internet time.
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 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.
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.
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."
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.
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.