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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.'"
Google included, a number of these stock prices are based on future earnings, not current earnings. The prices may seem rediculous (when looking at their P/E), but hopefully they should fix themselves as their earnings increase. The problem is that people think 300 bucks a share is what they are worth now, and may continue driving the price up, until to bursts.
Voice your opinion!
I'm shocked, shocked that people chose to invest based on derivation instead of valuation.
OK, so here's a $150,0000 question for you, smartarse:
What is a value of stock if not future dividends?
I disagree with any premise that a huge market prices stocks using one valuation criterion. Are internet leaders priced high because they aren't affected by economic cycles? That's not why I invested in some of them in the past (and one of them now). How many employees does Time-Warner have? How many does Google to return those kinds of profits? As computers get faster and cheaper and seep into every nook and cranny of our society, who is in better position to explore new markets in profitable ways?
Bubbles come and go on Wall Street all the time, and it really doesn't matter to them as long as Joe Blow Public takes the blowout so they can rake in the fees. I would think that the real estate bubble (if it is a bubble) might be more serious since a blowout would hurt Wall Street first (many brokerage firms are also involve in real estate finances). You can't rake in the fees if your house is on fire.
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.
I don't think this is the point the parent was trying to make. The point they are trying to make is that, as the gatekeeper of the internet, a valuation of 50 times next years profits may not be that big of a gamble. As more and more daily activities start to hinge around the internet, Google's importance as an indespensible tool becomes more and more valuble, both as a brand and as an eyball grabber.
Once you add in the possibilities of their foray into the browser world via Firefox, and their potentialto even make the operating system itself irrelevant to your work via things like GMail, and 50 times earnings is not so pie in the sky....
I'd take a look at this list and reassess.
One interesting note is that TW broadband would disappear, as well as AOL, mapquest, nullsoft, and netscape. The internet would certainly notice.
But let's look at entertainment...
HBO, Warner Bros, and The Atlanta Braves.
Last I checked, google makes all their money in one place. They are good at it, but they are not Time Warner in any way.
There is a big difference with Google, though: unlike most of those companies with great ideas, Google is actually bringing in profit and has a proven business model.
They simply want to buy Google because it's Google, it's cool, and its the "Next Big Thing!"
I'm reminded of Krispy Kreme, Yahoo, Cisco Systems, and the optical equipment companies such as Bookham and Corning, all of which still trade well below their peak.
But if you compare it to the immediately preceeding calendar quarter, it was down. When you're big enough that seasonal trends are a bigger part of profit variability than growth, you're not a wild growth stock anymore.
Everybody's a libertarian 'till their neighbour's becomes a crack house.
I'm impressed... you managed to put together an analysis of Googles valuation without considering *anything about it's actual value*.
You should be a broker "well, the P/E is through the roof, and the market is already getting shaky, but they're good guys. I'm recommending a buy".
Benjamin Graham w/commentary from Jason Zweig -
The Intelligent Investor
http://www.jasonzweig.com/
Warren Buffett's teacher and the father of value investing would probably not recommend this stock to buy. If you had bought it when it first listed that would be a different story but it's really dangerous to buy now.
Another recommended read:
Common stocks & uncommon profit - philip fisher
This is the father of growth investing
Google is overvalued. The question people should consider, is google really worth more than Wal-Mart, GM, GE, Microsoft, Lockheed, IBM or Coca-Cola? Philosophically, sure. Considering their current revenue model, will they become the largest company in the world? I think not.
Whereas if Google went bankrupt tomorrow, I would honestly be devastated.
No you wouldn't be devastated, you would switch to one of the other search engines so fast a few hours later you would forget about it. I have been in this business long enough that everything goes in cycles. Google is at the top of it's game.
But Google does have a good game, for the moment.
The article was bang on when it asked how a company with annual revenues of 3.4 billion can have a fundamentally higher market capitalization than companies which revenues in the $74 billion plus range? Where is the money? Are the Google shareholders receiving a dividend? How much is the IP really worth in licensing, advertising, and other revenue streams? The technical side of Google appears to be quite sound, but from business perspective their nose bleed share prices are not backed up by the realities of the corporate balance sheet. The current price of the shares, ~50 times annual earnings, has already PRICED IN an expected growth rate of 25-30% which means that unless Google can better that expected performance the share price is not justified. I work in the IT industry and I appreciate the services that Google provides, but the current share price looks like a come-on to a sucker bet. There will be a painful adjustment in the future and it will be interesting to see which big investors are left without a chair when the music stops.
The Dot Com bubble exhibited the same feeding frenzy behaviour. No one really knew the potential of the web, but every wanted in, and, the more the better. The collapse of the Dot Com bubble reflected, not only unwarranted investment behaviour, but the fact that the web couldn't deliver in a timely fashion, not too mention the bloated, vapour ware companies backed by wildly speculative VCs.
What we may now have is a Google Bubble. While investors may not be ready to reinflate the Dot Com Bubble and speculate wildly on the web as a whole, they might be ready to invest wildly in a darling of the web like the, do no evil, just too cool, Google company.
Me I'm gonna stick with Double Bubble and good 'ol Pud.
"Academicians are more likely to share each other's toothbrush than each other's nomenclature."
Cohen
I believe there was a Democrat in the White House during the entire Internet Bubble.
"I'd rather be a lightning rod than a seismometer." -Ken Kesey
Google's not the kind of company where investors read financial statements or annual reports or do a valuation. Otherwise, they'd ask themselves why Google trades for 45x forward earnings, when you can pick up just about any oil company, and get a dividend too, for 10x.
Tristan Yates
I believe there was a Democrat in the White House during the entire Internet Bubble.
But there was a Republican-controlled legislative branch. IIRC, the "rich ratio" started climbing in the 80's, stayed where it was at during the Clinton era, then started climbing again in the W era.
The dot-com bubble was kind of a freak event anyhow. Those kissing the P/E edge should know better by now, or at least should not be surprised when things go south. It is probably one of many stocks in a big, diversified portfolio this time. Anybody who puts all their millions into one stock needs a mental checkup.
Table-ized A.I.
One product of a massive income gap is that the winners, flush with cash, have less and less stuff to buy with their cash as investment assets become scarce. Everyone (in this market) has cash, but there are few easy ways to leverage it. As you move up the pricing tier, there are fewer and fewer buyers who can afford that investment, so market pressure seems to let up making investments seem more attractive. Diamonds from Tiffany's? Turning the table, the simpler explanation is that the more money a person has, the less each dollar means to them. The more cash you have, the less risk-averse you need to be.
Take into account that Google stock is kind-of like Google's currency: Googlebucks if you will and the Dollar is kind-of weak. This is like people saying that "we want to trade all of our US dollars for something backed by more than just US labor."
--- Nothing clever here: move along now...
I've been saying for 15 years that CS Ph.Ds are massively undervalued by the market.
Please back this up with facts. A CS PhD might not be the way to go, at least strictly. Combine that PhD with a Master's in another field, and then you're talking. Or, get a PhD in another field and a Master's in CS, probably even a better combination. Add in some business skills (undergraduate or MBA), also a winnner. But strictly CS PhD? I don't think that's undervalued at all. Now give me a biologist, economist, statistician, or MBA who can code, and you've got yourself a fat paycheck.
This has been the case for every update for IE since 5.5. IE ships with the OS. It defaults to MS Search. They have always done this. This simple problem is that MSN search sucks. Until MS fixes that huge glaring problem, no one will use MS search. Every time Google comes up at slashdot, someone always posts,"In longhorn search will default to MS, killing google." Well default or not, it's easy enough to change. Until MS search actually is a good as Google will competition be a problem for Google. Despite the 150 million dollar ad campaign for MS search they were only able to steal roughly .03 % of the market from Google in June.
They need a better search product. Search isn't about search web pages. It's about finding the information you need.
Thalasar
Not many of you are stock junkies I would venture to guess, and it is very important to empahsize the market capitalization point.
When it gets as high as it has for Google, no new investors enter. Which means PPS drops. It doesn't mean the company is any worse off financially, but it means that fewer people are willing to invest in something that doesn't return dividends like it should.
We've certainly got interesting times ahead. I would venture to guess Google's market capitalization will eventually reach that of ERICY, or Ericsson, which is also overvalued, about $52 billion.
At that point, the PPS will be about $194.34 and may actually fall further assuming there's some massive shorting and scare sells. You should be able to buy in sometime this year around 170 bucks. That is, given they don't do a stock split.
One or a handful of stocks does not make a bubble. Google's inflated price is partly a measure of the pent up desire for Internet stocks in general, which is being expressed only in the magic, untainted "Google" brand, which only became well known after the crash was safely defined in memory as "past".
The actual Internet Bubble was the opposite: any Internet stock was inflated, because buyers knew there'd be a shakeout, couldn't tell which ones would survive to win, so they hedged their bets by buying all of them. That hastened the collapse of the entire equity market, because the equity markets propped up losers, never letting either the equity market or the product market decide winners and losers.
When the Internet stocks look like the real estate market, with low interest rates, supported by Chinese purchases of our debt, propping up vast billions in inflated speculative real estate value, then we're back in a bubble. When a few Internet stocks are inflated, we're still looking at a market that can't do anything but boom or bust. We've learned very little from the Bubble and its Bust. Until we do, we'll never have the sustainable growth in the equity markets that reflect a healthy economy.
--
make install -not war
biologist, economist, statistician, or MBA
... o/~
o/~ One of these things is not like the others
The correlation between ignorance of statistics and using "correlation is not causation" as an argument is close to 1.
The society undervalues mathematicians and physicsts too...
... and overvalues doctors.
Agreed... very much agreed...
Well, some kinds of doctors (like dermatologists and radiologists), yes, but _all_ of them? This is not a straightforward issue, but I'd argue that it's in society's best interest to have at least some of its best and brightest going into medicine (instead of law school or business school). In places like England, where they're paid like barbers, the quality of specialized care (which does matter, even if preventive medicine stamps out 99% of the problems) is not as good as it is here.
Most of these people can be become doctors if they want to.
That depends. Medicine is all about informania. Millions of little unrelated details, often drug doses that are empirically derived, must be memorized. A mechanical engineer might feel like a sports car on an off-road track in that environment.
I know that of which I speak, 'cause I'm an engineer-physician.
I dont see any buying, just alot of selling from a few select folks.
It's called diversification. When a stock triples from its IPO like that it leaves the insiders with all their eggs in one basket. I don't care how positive you are on the company at that point. It'd be lunacy to buy, and prudent to sell.