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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.'"
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.
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.
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.
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
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.
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