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.'"

Comments

Hopefully not

[mfloy]

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.

Valuation is in the beholder's eye

[DoctoRoR]

The arguments for these high valuations (and Yahoo!, at around 60 times expected profits is right up there too) all boil down to one: the growth in internet firms' business reflects a secular shift that is broadly impervious to economic cycles and has a long way to run.

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?

What about the real estate bubble?

[__aaclcg7560]

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.

Re:What about the real estate bubble?

[Monkelectric]

Bingo. The real-estate bubble will be the great depression all over again if it bursts. We are teetering on the edge of disaster. In san diego and orange counties (california for thsoe who don't know), the average price of a house is around 600k... About 15% of the residents can afford to finance that.

Which means a lot of very risky loans have been written. When the economy slows down (which it will we have *VERY* bad fundamentals), those lonas will come crashing down, the foreign investors who have been financing our debt-financed economic boom will pull out their money, and we'll have the bank runs and ruin of the great depression. I hope not, but it could very easily happen.

Re:What about the real estate bubble?

[anthony_dipierro]

I agree that it's a credit bubble, but I think your analysis of the credit card situation is a bit overdramatic. Only a minority of people have 20% interest rates nowadays. Personally I have about $25K in credit card debt, with a weighted average interest rate of 3.25%.

It has gotten so bad in the housing market now that people are having to do negative amortization loans.

People are buying houses based on their monthly payments. This is fine if they get a fixed interest rate, and plan on living in the same place for 30 years. What will happen is interest rates will go up, the value of their house will go down, and they'll be stuck. Those people speculating on the interest rate swaps will get killed, people in the bonds market will get killed, but the homeowners will be fine as long as they don't move (and we don't wind up in a major deflationary environment, which is unlikely).

But another big problem is the increasing percentage of home buyers taking loans with variable interest rates. They are going to get burned, and burned hard. Most of them are forced into variable interest rate loans because they can barely afford the house in the first place. When interest rates go up, they're going to default.

This could have a terrible spiraling effect on the rest of the economy, but now that the bankruptcy laws have been changed so that it's very difficult to file for Chapter 7, the economy will probably survive without going into a major depression. Instead, those who took out those variable interest rate loans will become slaves to the banks.

Re:Worth it

[missing000]

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.

Cult Stock

[CaroKann]

Google is a cult stock. People buying Google don't care about any valuation calculations or reason.

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.

Recommended Reading

[maioriel]

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

Irrational Exuberance?

[CodeBuster]

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.

Re:Missing "Next Big Thing"

[winkydink]

I believe there was a Democrat in the White House during the entire Internet Bubble.

Financials? Who reads those?

[tyates]

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.