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Another Internet Stock Price Bubble Building?

Posted by Zonk on from the pop dept.

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.'"

13 of 320 comments (clear)

  1. Worth it by FTL · · Score: 4, Interesting
    > 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.

    I don't know about most people, but if Time Warner went bankrupt tomorrow, I would not notice (beyond having to delete channels 33&44 (CNN) from my grandmother's TV). Whereas if Google went bankrupt tomorrow, I would honestly be devastated. Heck, even my grandmother would be upset, she'd wonder where "the Internet" went. Granted, the vacuum would be filled very quickly by one or more entities.

    Google also have an unusual combination of being both a) at the forefront of its market and b) good and ethical. Contrast with companies like Microsoft (forefront and evil), companies like Apple (distant second and good), and companies like SCO ('nuff said). Name another company that's both #1 in market share and #1 in user respect...

    Google's worth every penny of its valuation.

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    1. Re:Worth it by bheer · · Score: 2, Interesting

      Actually, it isn't. Google offers nothing that cannot be cloned by MSN or Yahoo within a year (and they have a userbase that's quite attached to them, esp Yahoo). Watch out for Yahoo's Oddpost-powered Yahoo Mail refresh and MSN's new Hotmail to beta this quarter.

      The way I see it, Google's value is in its ability to be a disruptive innovator in the marketplace and make some money off its first-mover advantage. But its success at monetizing its first-mover advantage (almost exclusively through Adwords) has been good-to-lukewarm at best. Whereas Yahoo has been steadily diversifying its revenue stream.

      YHOO's currently doing about $35 where GOOG's doing $300. Sure there's a premium on perceived Google's tech superiority, but it's probably worth 2x or 3x YHOO. 10x does not make sense, long term. (It's fine if you want to make short-term gains, however.)

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    2. Re:Worth it by po8 · · Score: 4, Interesting

      "Google offers nothing that cannot be cloned by MSN or Yahoo within a year."

      Wrong. They own a pile of really skilled Ph.D.-level employees, and are hiring them at a rate unprecedented even during the glory days of Bell Labs and IBM. Google has bet the farm on the idea that putting some of the nation's smartest people in a productive work environment will make the company money. Essentially, they've taken a long position in Ph.D. futures. So far, the gamble seems to have paid off. Google has been launching services with big upside potential and low risk at an incredible clip, and the market has rewarded them for it.

      I've been saying for 15 years that CS Ph.Ds are massively undervalued by the market. (Disclaimer: I have one now.) I personally think Google is about to demonstrate the truth of this proposition. But win or lose, at least it's an interesting business model.

    3. Re:Worth it by jondt · · Score: 2, Interesting

      Unfortunately the metrics you use don't map to decent future earnings - which determine the price of a stock.

      Microsoft is guaranteed future earnings as it's unlikely - in the near future - to move anywhere away from #1. Businesses have systems that are locked down to the MS platform. The *vast* majority of users are tied down to Microsft products through the - often not very transferable (or at least at first sight) - skills they have learnt.

      Apple a distant second? Don't forget that the majority of its revenue comes from ipods: where they are anything but second.

      Google deserves a respectable share price: it has talent and cash with which to design/buy decent products. But where will its revenue come from? ATM ads, but that has a limited income. Google's products all seem to be given away for free: maps, webmail, search, ... Don't forget that they also have plenty of competitors to keep prices low.

      With a massive P/E of 120, I'd say Google was overvalued...

      dgr

    4. Re:Worth it by GNUALMAFUERTE · · Score: 2, Interesting

      TV Channels, who cares about TV anyway besides the illiterate masses?

      Mapquest?, there is google maps.
      AOL, the worst ISP ever?
      nullsoft, a proprietary solution, when you have got XMMS?
      Netscape, when it's based on Mozilla? ...

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    5. Re:Worth it by po8 · · Score: 3, Interesting

      Folks' ideas of what a (good) CS Ph.D. is are really cracking me up, and are at the heart of why they are IMHO undervalued by industry. Have any of the respondents actually worked with a group of Ph.D.-level CS folks for any length of time? It sure doesn't sound like it. I've worked in almost every computing context you can imagine, and the Ph.D. research groups are the scary-best bunch of them all.

      It's certainly true that Ph.D.s often require care and feeding, and are sometimes a lousy fit for mundane programming tasks. But those tasks aren't what is driving Google's new ventures: it's innovative ideas, conceived and implemented by a team headed by incredibly clueful people. This is what Ph.D. researchers are skilled and trained to do.

      I recently consulted for a growing company that had been stagnating in bringing a tech app online for several years. I came in and in about 4 months solved a bunch of business and organizational problems, rewrote a bunch of their code to be 10-100x more efficient yet much simpler, and got them on the road to profitability. I don't think those folks will be saying anything bad about Ph.D.s anytime soon.

    6. Re:Worth it by Anonymous Coward · · Score: 1, Interesting
      (Disclaimer: I'm posting anonymously because I work at Yahoo, so expect some bias ;) )

      You miss the point. Even if I agreed with you that putting a ton of Ph.D. level developers together would somehow translate into great products (I don't - most CS Ph.D's I've met or talked to are generally clueless outside the narrow field they wrote their dissertation in - I'd take practical software engineering experience over a Ph.D any day - most of the good people I've hired have actually been people without degrees that went straight into the workforce because they had enough of an interest in software engineering to have picked it up before they reached college age) there is still the difference between coming up with a great product and cloning it.

      Assuming that Google manages to keep cranking out these apps, the problem is that they are easy to copy - it took me less than a day to clone the basics of the Gmail interface without ever looking at the source of any of their javascript / HTML (no, I don't work on mail these days - I was experimenting on a hobby basis because I was curious). Writing the mail system itself would take longer, but is a solved problem for most of the larger portals (or can be done by a small team - I've designed and managed development of a mail system for a few million accounts before, and know from personal experience that a scalable platform can be written from scratch and deployed with 4-5 engineers in less than 6 months).

      Copying the "new" parts of the Google Maps interface took me 3 hours for a proof of concept (not for work reasons, mind you, I just wanted to see how hard it was). It's getting the map and direction data and doing route planning that takes time, but that is also a "solved problem" in that the data and software can be bought off the shelves for less than it costs to headhunt a single of your precious Ph.D holders.

      Now, consider that Yahoo! for instance employs significantly many more engineers than Google employs people total, and can easily afford to hire thousands more if they thought it was needed, and that Microsoft employs about 5 times as many people as Yahoo! total, and can easily afford to hire tens of thousands more if they thought it was needed, and I hope you realise that the uniqueness of Google's services is there at the mercy of Yahoo! and MSN, not because they can't be easily cloned.

      The same is true for practically any Google service. The only one I can think of that is hard to duplicate is Google Groups due to the historical archives. But Google groups is miniscule compared to Google's other services.

      That is the key: Yahoo! and MSN doesn't bother spending much resources on copying many of Google's "innovations" since most people couldn't care less. Geeks may drool over the technicalities of Gmail and Google Maps (which was nothing new, btw. - look at http://www.search.ch/ for a similar and older map interface), but of the Hotmail and Yahoo! Mail users I've spoken to for instance, hardly anyone that have looked at Gmail were impressed or cared enough to be interested in switching.

      The difference between Yahoo!, MSN and Google, is that Google is a technology company while Yahoo! and MSN are media companies that happen to "have to" develop a lot of products because what they want to do isn't available off the shelf.

      From a Yahoo! and MSN standpoint Google is throwing money out the window building features that the users that generate most of their money doesn't care about. In contrast, the Yahoo! approach is that in most cases it's better to spend far less to clone a product or buy a product after it's proven than to spend a ton of money building something that is unproven. The advantage is that you get to learn from your competitor and get far more bang for your bucks. Not least because building the product is the easy part - it is marketing and monetizing the product that is hard.

      That's why - if you talk to Yahoo! engi

  2. Seeing the same problems? by DrEldarion · · Score: 3, Interesting

    It seems like we're seeing the same problems with companies like Google that we were seeing a few years ago. Companies had lots of great ideas, but the problem came about when trying to actually make money on those ideas. This is what caused the demise of so many different startups.

    Google is a wonderful company, but problems seem like they're going to arise as they get bigger and bigger and create more and more products, but don't charge for anything. As great as free stuff is, it doesn't pay the bills.

    I guess the question is how long they can survive on their advertising alone.

  3. This isn't your father's Internet bubble by Dachannien · · Score: 2, Interesting

    This time around, the large P/E ratios for Google and kin are based on actual earnings. In 1999, most of the Internet stocks weren't even making profits yet, and the huge P/Es were based entirely on ephemeral earnings estimates. But now, Google made $1.29 per share this past quarter (ignoring stock option expenses, which, by the way, will be of lesser impact in subsequent quarters), and is projected to make as much as $8 per share in 2006.

    Once the growth projections taper off, the stock price will decrease off its highs, but for now, Google is slightly conservatively priced.

  4. Missing "Next Big Thing" by Tablizer · · Score: 2, Interesting

    Because the Republicans in control are happy to let the rich get even richer (ratios not seen since the 1920's), there is a lot of spare money floating around seeking investments. However, there is not a lot that looks promising to the investors. Thus, they chase after the few stocks that look semi-promising, and this is where the Yahoo's and Google's fit.

    Also, every 15 years or so a new "Next Big Thing" usually pops up and attracks a hell of a lot of investors. But the NBT hasn't appeared yet so the cash is piling up. Past NBT's include automobiles, telephones, railroads, satellites, TV, computers (mainframes), PC's, the internet, etc.

    In short, the rich have too much spare money.

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  5. Only in odd numbers by NigelJohnstone · · Score: 2, Interesting

    "Google has bet the farm on the idea that putting some of the nation's smartest people in a productive work environment will make the company money."

    Nah, put an even number of PhD's in a room and they cancel out. You either have to put an odd number of PhD's in the room, or lots of PhD's and a common sense manager to throw half of them out and to know which half to throw out!

    The good thing about Google isn't the PhD's, its that it lets its people do stuff. Large companies generate an inertia because the people in them are never allowed to change things and so they end up like Oracle or MS, minor upgrades, nothing too shocking, all very predictable....

  6. It's not your father's stock market. by lanced · · Score: 1, Interesting

    This is not your father's stock market. Didn't anyone else realize that this technological growth spurt would also carry with it a new reality of the stock market? Once technology allowed John Smith to trade stocks in his living room, the stock market changed forever. The stock market is no longer rational people evaluating business; instead it is now the public wagering on the future. And the stakes (and the stocks) are high.

    This is not your father's stock market. This revolution is not about market cap, future potential or any other factor that is measurable. It is about knowledge and progress, rather than nuts and bolts. It is about people supporting what they like on the assumption that the price of the stock will continue to raise while good things are still happening at that business. It is not about ROI, dividends and PE ratios; rather, it is about visibility, selling price and simple popularity.

    This is not your father's stock market. This is the American thermometer that reflects our collective knowledge. Several weeks ago, Wired published an article that cited a report stating that the people in the World Trade Center on 9/11 were much better informed than the emergency workers on site. To quote classis sci-fi, "A person is smart. People are stupid, panicky, dangerous animals, and you know it." But there is a third category: an informed group can be much more than the sum of its parts. If you need proof, go look up collaborative intelligence in the wikipedia.

    To your father who is now complaining about the unnatural state of the market, I have just one piece of advice: welcome to the next generation. We may not be the greatest generation, but we certainly know what we like and we are showing you. If all this seems a bit too unpredictable, then get out of the way because there are no leaders here and the followers will certainly lose money.

    Welcome to the new world order -- Welcome to MY World.

  7. Insider trades by Pizaz · · Score: 2, Interesting

    Check out the recent transactions from some of the biggest insiders at Google.

    http://finance.yahoo.com/q/it?s=GOOG

    http://moneycentral.msn.com/investor/invsub/inside r/trans.asp?Symbol=GOOG

    I dont see any buying, just alot of selling from a few select folks.