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Another Internet Stock Price Bubble Building?
Anonymous Coward writes "The Economist has a column looking at the valuations of some of the Internet's darlings, with a particular emphasis on Google. From the column: 'Valuations are, in fact, better founded than many of them used to be. But around 50 times next year's expected profits is still quite a leap of faith. At the levels seen in recent days, the price of Google's traded shares implies that it is the world's most valuable media company, with a market cap comfortably in excess of Time Warner's $76 billion, even though the latter had $42 billion in sales last year to Google's $3.2 billion. True, Time Warner's business is increasing at a snail's pace compared with Google's. But putting so high a price on future growth only makes sense if all's for the best in this best of all possible worlds. And it isn't.'"
What means: 1 trekking bird does not make it summer
The difference with the Internet bubble is that the companies talked about are growing, have a real income base and most of them profit. So even if there is a bubble building, when it bursts, it will not be of the same magnitude, there is a clear bottom (like 15 to 20 time the expected or real profit).
BTW: With googles market cap, can't they buy Warner and get the basics that way better?
My wife's sketchblog Blob[p]: Gastrono-me
You seem to presume that a company's value can be measured in terms of your personal experience with it. In fact, there are many companies which, if they went bankrupt tomorrow, would not be noticed by you, but nonetheless bring in good profits and offer strong growth.
And a company's valuation has as much, if not more, to do with how well it is managed as how well its products are received. Google's popularity says they can bring in revenue, sure, but if Google's management is deficient, it doesn't matter how popular its services are; as a company, it's a bad investment.
The following enterprises are part of Time Warner:
Google can survive on advertising alone as long as they attract lots of eyeballs, and can thus charge lots of money.
Aside from that - Google has other revenue streams. They sell search appliances and services, they license products to other companies (see CNN's use of Keyhole aka. Google Earth).
Yet another troller making unfunny jokes...
I'm sure that you have no idea how it all started and why the original joke was Funny, so let me waste my time on giving you and other slashdotters some background.
The original joke by Yakov Smirnoff was, "In California, you can always find a party. In Russia, the Party can always find you!" or "In America, you watch television. In Russia, television watches you!"
The implication is that the latter use of the noun "party" implies the Communist Party, and refers to pervasiveness of the Communist party in Soviet Russia. Thus, for a joke to have the same intent as the original, the latter part should be both different from the former part of the joke and describe a characteristic of Soviet Russia.
It is also worth noting that at the peak of Smirnoff's celebrity in the mid-1980s, he did not say "Soviet Russia" -- he said "Russia," as the Soviet Union had been around since 1917, was still extant, and showed no signs of imminent collapse. Smirnoff added the "Soviet" qualifier after the fall of the USSR, long after his fame had faded, to specify that he was referring to the communist regime and not the present state.
Now, the general form of the Soviet Russia joke is that the subject and objects of a statement are reversed, and "In Soviet Russia" or something equivalent, is added. A modern example: "How do you feel about tabbed browsing? In Soviet Russia, web browsers keep tabs on you!" (barely funny) or an apolitical joke: "In America, you can catch a cold. In Soviet Russia, cold catches you!" (not funny at all)
However, the original context of the "In Soviet Russia" jokes have been completely lost thanks to uneducated illeterates on Slashdot et all. and thus the unwanted Yakov Smirnoff's legacy is the unfunny "In Soviet Russia" jokes, which frequently appear in many online communities today.
I hope someone will find it Interesting.
(Posting as AC - no karma whoring)
In The General Theory of Employment, Interest, and Money, John Maynard Keynes laid out the big picture of 'value': When you look at an economy as a whole, you see that money flows from one place to another, then back again, making cycles. The question of value isn't whether one thing is intrinsically more worthwhile than another, but whether it has the power to pull a higher concentration of money into a given part of the system.
Along with that goes the idea that the overall value of money is based on people's willingness to use it. There are simple abberations.. put too much currency into an economy and you get inflation, restrict the flow of currency too much and you get a recession.. but even in a more or less balanced economy, people have to decide whether to spend their money on X today or Y tomorrow. Those decisions determine both where the cash goes, and how much buying power a unit of currency has.
Boil it all down, and you get the idea that 'wealth' is strongly tied to people's willingness to invest in the future.
Time Warner may be big, but is business model is old, well, understood, and frankly, not so healthy. Information on the internet competes with information managed by traditional media companies, and the differences in distribution models, usage models, and cost of entry are playing hell with prices in the traditional sector.
Google may be an unknown, but it's demonstrated its ability to make actual profits while distributing information on the internet. People are willing to invest in that model of the future, and that makes Google valuable.
Are people overestimating the potential value of the internet-information market? Possibly. But this time they're investing in a company that makes actual profits, as oppsed to the last dotcom boom, where people invested in the idea that 'branding' was synonymous with future profits.
If it turns out that Time Warner's $42B/year market dissolves into an internet information market worth, say, $8B/year, the investors who've bet that Google's cap will reflect current market conditions will lose money, and Google's stock price will go down. But it will happen slowly, as investors gradually work out the real value of the new information market. It won't be a cascade-failure like last time. At very least, there's no reason for Google's shares to drop below the reasonable value for a company that earns $3.2B/year.
Profits matter, not revenue. A company that makes a profit of $1million with sales of $20 million is far more preferable than a company that sells $75 billion worth of stuff but barely manages to squeak a profit.
Still, I agree with your main premises.