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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 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!
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
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.