GOOG worth $30/share? (per Hussman)

M

mtzianos

I found Hussman's comments from a few months ago rather intriguing. And quite logical.

Although I like Google very much and use it as my main SE daily(in additions to its other services like paid ads etc), at over $100bn the company looks a bit pricey.

I also happen to have experience in the search engine market, the competition, the paid services (AdSense network, Adwords and their competition) etc.

I would say that Google is way ahead its main competitors sofar, but this could easily change in 6-12mo, especially with regard to its "partner network" in this very volatile sector. For the past 2yr Google has enjoyed a virtual monopoly in that sector.

I very rarely (almost never) trade individual stocks, but I wonder, would GOOG's stock phenomenal performance be related to big money pools having accumulated large positions and pushing its price up regardless of valuations and funnymentals, to "front-run" the inclusion in SP500?

Lucky index fund investors...

1/5 of General Electric?

Which brings us to Google. Initially, I estimated Google to be worth about $24 a share. It has since enjoyed some very good operating surprises. I'd currently estimate its value somewhere in the $30's. No zero is missing in that last sentence, though the quickest way for the company to substantially enhance its intrinsic value would be to buy everything it possibly can with its own overvalued currency. Having made similar comments regarding the value of Cisco, Sun, EMC and Oracle near the peak of the tech bubble, with value estimates (which turned out to be slightly optimistic) at small fractions of their going prices, I'm pretty comfortable with that figure.

The difficulty with Google isn't in the product. It's neat. It's hip. I use it almost daily. The real question is this – why do we naturally assume that Google's revenues and earnings are going to grow exponentially from here? In a competitive market, with few barriers to entry and no particular brand loyalty, an advertising company that's valued at 1/5 the market cap of General Electric is not likely to mount a secure defense for its revenue stream. Unlike Microsoft, Adobe, or even Yahoo and Ebay, there's currently no benefit to users in aggregating around the same product as their “standard” (note to Google – this is really where you ought to be focusing your attention) and no high-cost obstacle to entry aside from smart statistical and computing algorithms. Therefore, there's no natural monopoly that would lead to a defensible competitive advantage. Sure, these guys are smart, and deliver useful, consumer oriented products. But when you value a company at 20 times revenues and over 100 times earnings, you're going to invite competition from some very, very intelligent people.

Given the company's business model, the long-term growth process is much more likely to represent a blend of logistic and extraction processes than the explosive exponential process that analysts seem to be taking for granted. And wow, will that make a difference over time.

My impression is that the explosive growth we've seen in Google's revenues recently has been very much a “simultaneous adoption” effect. With the enormous notoriety the company has enjoyed, it's natural that advertisers would want to try out that venue, and even pay a premium to do it. At present, however, the value of a click from Google is worth no more to an advertiser than a click from another source, so even if the value of Google's free product (search) is good, the value of their paid product (advertising clicks) is no higher than its competitors. And nobody, free or paid, has any inherent loyalty or reason to stay if another product emerges that is marginally better. This isn't the stuff that defensible profits are made of.

What investors seem to be doing is paying an awful, awful lot for future creativity. That might be reasonable, to at least some extent, if the company's dominant position in the industry had characteristics of a natural monopoly. But it doesn't. Usefulness of a product is insufficient for profitability unless it is coupled with scarcity. Why does Wall Street take it as given that the company will grow explosively into the indefinite future, much less maintain its profitability or market share over time?

To paraphrase Grantham, if Google is worth $300 a share, capitalism is broken.
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http://www.hussmanfunds.com/wmc/wmc050613.htm
 
goog is worth 450 a share according to cramer last night. get with it man. lol

actually i dont think your author understands google. they are more than an advertisong company. they can eventually get a cut off every sale from anyone that uses goog to search for products or services anywhere on the net. that is a huge number of transactions.
 
Quote from mtzianos:

I found Hussman's comments from a few months ago rather intriguing. And quite logical.

Although I like Google very much and use it as my main SE daily(in additions to its other services like paid ads etc), at over $100bn the company looks a bit pricey.

I also happen to have experience in the search engine market, the competition, the paid services (AdSense network, Adwords and their competition) etc.

I would say that Google is way ahead its main competitors sofar, but this could easily change in 6-12mo, especially with regard to its "partner network" in this very volatile sector. For the past 2yr Google has enjoyed a virtual monopoly in that sector.

I very rarely (almost never) trade individual stocks, but I wonder, would GOOG's stock phenomenal performance be related to big money pools having accumulated large positions and pushing its price up regardless of valuations and funnymentals, to "front-run" the inclusion in SP500?

Lucky index fund investors...



http://www.hussmanfunds.com/wmc/wmc050613.htm
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Hussman is displaying a classic judgemental bias called representative bias when he says "Having made similar comments regarding the value of Cisco, Sun, EMC and Oracle near the peak of the tech bubble, with value estimates (which turned out to be slightly optimistic) at small fractions of their going prices, I'm pretty comfortable with that figure."

I am surprised that an investor of his stature would make that mistake, but I have to remind myself that I am indeed 100% cynical when it comes to the forecasting prowess of gurus.

What also gave me a good laugh was the following comment: " and no high-cost obstacle to entry aside from smart statistical and computing algorithms.". Um, excuse me? aside from smart statistical algorithms? How about throwing out the baby with the bath water while you're at it? LOL.

The reason why GOOG has done so well in growing earnings is precisely because its algorithms lead to superior monetization, relative to YHOO. Secondly, Hussman is grossly underestimating GOOG's expansion abroad and the upside from margin expansion there, as well as GOOG's potential impact on the media sector.

Hussman should stick to his broken toys like the Fed model. I do enjoy reading his big picture comments though :)
 
yahoo finance shows goog's p/e ratio at 78. I don't trade stocks and I am primarily technical, but that seems ridiculous. I would wait for it to start to break and short the sh_t out of it. I have heard about people doing that all the way up and they are probably broke now, goog sure seems like a tough long-term buy stock though.

5yr
 
Straight out of the 9/15/2005 424B4:

We generate our revenue almost entirely from advertising, and the reduction in spending by or loss of advertisers could seriously harm our business.



We generated approximately 99% of our revenues in 2004, and in the six months ended June 30, 2005, from our advertisers. Our advertisers can generally terminate their contracts with us at any time. Advertisers will not continue to do business with us if their investment in advertising with us does not generate sales leads, and ultimately customers, or if we do not deliver their advertisements in an appropriate and effective manner. If we are unable to remain competitive and provide value to our advertisers, they may stop placing ads with us, which would negatively affect our revenues and business.



We rely on our Google Network members for a significant portion of our revenues, and we benefit from our association with them. The loss of these members could adversely affect our business.



We provide advertising, web search and other services to members of our Google Network. The revenues generated from the fees advertisers pay us when users click on ads that we have delivered to our Google Network members’ web sites represented 49% of our revenues in 2004 and 46% of our revenues in the six months ended June 30, 2005. We consider this network to be critical to the future growth of our revenues. However, some of the participants in this network may compete with us in one or more areas. Therefore, they may decide in the future to terminate their agreements with us. If our Google Network members decide to use a competitor’s or their own web search or advertising services, our revenues would decline.



Our agreements with a few of the largest Google Network members account for a significant portion of revenues derived from our AdSense program. In addition, advertising and other fees generated from one Google Network member, America Online, Inc., primarily through our AdSense program, accounted for approximately 12% and 11% of our revenues in 2004 and in the six months ended June 30, 2005, respectively. Also, certain of our key network members operate high-profile web sites, and we derive tangible and intangible benefits from these affiliations. If one or more of these key relationships is terminated or not renewed, and is not replaced with a comparable relationship, our business would be adversely affected.
 
Quote from vhehn:

goog is worth 450 a share according to cramer last night. get with it man. lol

actually i dont think your author understands google. they are more than an advertisong company. they can get a cut off every sale from anyone that uses goog to search for products or services anywhere on the net. that is a huge number of transactions.
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Maybe Hussman doesn't fully understand Google's products, but I do (at least thought so).

AFAIK there is no service where "they can get a cut off every sale from anyone that uses goog to search for products or services anywhere on the net".

The closest one is Froogle, which is still more or less experimental and Google isn't involved in the transaction between e-merchant and client. It's a replica of the SERP ads, but the result set if consisting of product listings rather than HTML pages.

I could go into great detail, but it'd be off-topic for a trading site like ET.
 
Quote from Enfinity:

Straight out of the 9/15/2005 424B4:
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Thanks, the extract from Google themselves described things very accurately and objectively. A must read IMO.

On my knowledge of SE industry, I would agree with Hussman on his point about "simultaneous adoption" during the last 2-3yr. I would still expect growth, but it won't be explosive anymore.

To paraphrase Greenspan, much of low-lying fruit have been picked.
 
Quote from mtzianos:

Maybe Hussman doesn't fully understand Google's products, but I do (at least thought so).

AFAIK there is no service where "they can get a cut off every sale from anyone that uses goog to search for products or services anywhere on the net".

The closest one is Froogle, which is still more or less experimental and Google isn't involved in the transaction between e-merchant and client. It's a replica of the SERP ads, but the result set if consisting of product listings rather than HTML pages.

I could go into great detail, but it'd be off-topic for a trading site like ET.
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i should have said eventually but major companies like walmart ,best buy ect have affiliate programs where you can get a cut of the sale by directing trafic to their site. imagine billions searches where goog directs to their site and you get billions of little cuts of the sale every day. it adds up.

http://www.walmart.com/catalog/catalog.gsp?cat=416131#5
Referral Fees
We will pay you Referral Fees on certain product sales to third parties generated from our Walmart.com web site only. For a product sale to generate a Referral Fee, the customer must

use a browser that has its cookies setting enabled;
follow a Qualifying Link (in the format specified by Walmart.com) from your site to the Walmart.com site;
purchase the product using our automated ordering system;
accept delivery of the product at the shipping destination; and
remit full payment to us.

We will pay Referral Fees on products that are added to a customer's Shopping Cart within four (4) hours after the customer has initially entered our site ("Referral Fee Time") as long as the customer reenters our site directly during that time (and not through another affiliate link). We will not pay Referral Fees on any products that are added to a customer's Shopping Cart on our site when a customer has re-entered our site (other than through a Qualifying Link from your site) after the Referral Fee Time, even if the customer previously followed a link from your site to our site. Purchases from Sam's Club and Samsclub.com, Pharmacy, Travel, Financial Services, Wal-Mart Connect Internet Service, Gift Cards, and Online Gift Cards are not eligible to earn Referral Fees. Customer Service invoice adjustments and reorders are not eligible to earn Referral Fees. Products that are entitled to earn Referral Fees under the rules set forth above are hereinafter referred to as "Qualifying Products."

Referral Fee Schedule
You will earn Referral Fees based on the sale price of Qualifying Products (as defined above), according to fee schedules to be established by us. "Sale price" means the sale price listed on our site and excludes costs for shipping, handling, gift-wrapping, rebates, refunds, returns, chargebacks, cancellations and taxes. The current Referral Fee Schedule is:


Qualifying Product Category Monthly Referral Fee Rate Maximum Payout
Gifts 12% None
Jewelry 12% None
Apparel 12% None
Books 8% None
Toys 8% None
Sports 8% None
Home 8% None
Lawn & Garden 8% None
Pets 8% None
Optical* 8% None
Photo Center 8% None
Tires* 8% None
Electronics 6% None
Video Games 5% None
Music 5% None
Music Downloads 5% None
Movies 5% None
Other 5% None
 
GOOG has almost $30 per shares in cash and is has over $2 billion positive cash flow from op ttm. Guess this dude is smoking the pipe!
 
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