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!
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
http://www.robinsloan.com/epic/
It all makes sense after that.
Just add {In Space!} to anything.
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.
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.
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.
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.
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.
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.
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.