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Google shares rallied an additional 5.7% yesterday to close at a record high $255.45/share. Although the numbers don’t really matter at this stage of the insanity, here they are in quick order: 19.2 times sales, 26.7 times tangible book, 103.9 times trailing earnings, 79.3 times free cash flow*, and 2008. This last number represents the year when Google will be trading at a P/E multiple of 20 (using a growth assumption of 31.5% annually and starting from an EPS base of the last quarter annualized).
I say that the numbers do not matter because, quite honestly, they don’t. Rather, Google’s stock price is riding a speculative wave of investor optimism the likes of which have not been seen since 2000. Astonishingly, even the same cheerleading squad from 2000 has joined the party: Cramer says Google is undervalued and going to $280/share.
Time to Short Google?
Overly optimistic assumptions or not, it is impossible to predict exactly when and why Google shares will suffer a setback. The lesson that comes to mind every time you feel the urge to speculate on the direction of Google is never time the markets. Many short sellers and bears learned this lesson the hard way in the 1990s, or when stock prices rose above valuation levels that were historically considered unthinkable and then promptly tripled, leaving the shorts broken.
Suffice to say, if you dare short Google shares you should have a lot of patience and extremely deep pockets. Moreover, you should be aware that there is also the extremely remote possibility that Google’s stock price will hold at insane levels until the fundamentals catch up.
Google Started The War
When Google expanded its online email service its competitors took notice. Although reacting to Google, competitors have yet to respond in kind…
Microsoft has some time consuming battles already underway (gaming consoles, downloadable music, the Linux issue, etc.). Nevertheless, so long as cash from Windows and Office keeps rolling in Google’s unimpeded expansion runs the risk of sparking an unprecedented online war. Google has a couple billion to play with and pulls in a few hundred million each quarter while Microsoft has more than $30 billion to play with and more than $11 billion rolling in each year. Let the games begin?
While it may seem ridiculous to say that MSFT and GOOG will face off in a head to head war for desktop dominance, it may be an even more ridiculous notion to think that Gates and company will watch the future that they have planned for slip away so easily. Recent words from Ballmer and Gates suggest that Microsoft is growing increasingly irritated with a world gone Google.
Google is an advertising company
During the unprecedented expansion of computers and the internet during the 1990s Microsoft owned more than 90% of the market and could raise prices at will. However, even during the 1990s Microsoft never sustained a 5-year stretch of 30+% earnings growth. To suggest that Google – with 98.7% of revenues coming from Advertising – can accomplish what the great Microsoft could not seems absurd. Indeed, even assuming that Google remains the preeminent search engine and increases its competitive position in other areas (email, web pages, selling stuff, etc.), it still is unlikely to be able to achieve the near term (3-5 years) growth numbers that investors expect it to produce.
Google is a hot web presence -- perhaps the hottest thing since Netscape busted on to the scene more than a decade ago. But make no mistake; Google is in no way a monopoly.
* When you back out the non-recurring cash from the Yahoo settlement and shift the tax benefits from stock based compensation down a few lines (FASB123), Google’s trailing price to free cash flow multiple is north of 100 |
