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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 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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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.
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
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 wouldn't put too much stock into Google. Not after watching how MSN Search is growing off on the horizon...
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.
...the stock market will climb higher, and higher, and will never crash. You'd be crazy not to dump your entire life savings into the stock market in general and google in particular. We're all going to be rich!
ITs not about the intellegence of the companies, tis about the intellegence of the investors. Google is wildly overpriced for its income. If google managed to take its (fairly well saturated) business model and grow it TEN FOLD it still wouldn't have the income of Time Warner.
The fault is that of the market, and of the people who invest because it's cool. Unless you count the data center (which is losing value every day) and a few aeron chairs, Google owns a bunch of expensive-to-maintain smart people, and they don't really sell for much on the open market. They have a great flagship product, and some cool second tier projects, but I'm not convinced they know how to take all this capital and really put it to work making money.
Is it just my observation, or are there way too many stupid people in the world?
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.
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).
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.
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
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.
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
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.
Table-ized A.I.
"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....
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
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.
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...
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
people will type google.com on that search bar
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.
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make install -not war
Check out the recent transactions from some of the biggest insiders at Google.
e r/trans.asp?Symbol=GOOG
http://finance.yahoo.com/q/it?s=GOOG
http://moneycentral.msn.com/investor/invsub/insid
I dont see any buying, just alot of selling from a few select folks.