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

Worth it

[FTL]

> 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.

Re:Worth it

[Blue Neon Head]

You seem to presume that a company's value can be measured in terms of your personal experience with it. In fact, there are many companies which, if they went bankrupt tomorrow, would not be noticed by you, but nonetheless bring in good profits and offer strong growth.

And a company's valuation has as much, if not more, to do with how well it is managed as how well its products are received. Google's popularity says they can bring in revenue, sure, but if Google's management is deficient, it doesn't matter how popular its services are; as a company, it's a bad investment.

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.

Re:Worth it

[po8]

"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.

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.

Benjamin Graham is dead...

[Milo77]

...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!

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.