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Google: riding the runaway bull
By Cody Willard 1/13/2006
Is Google's market cap, which just touched the $140 billion level, completely detached from reality?
Is there any way possible that this company -- in existence for less time than Kobe Bryant's been playing in the NBA -- is actually worth 140,000,000,000 dollars?
For owners, traders and player-hating Google shorts, that's really the only question. There's no question that Google's (GOOG, news, msgs) has delivered some of the most amazing growth Wall Street has ever seen. And there's no question that, with the company positioned as the content-agnostic gatekeeper to all the world's content, Google's fundamental prospects shine with visible hypergrowth prospects that few, if any, companies have ever rivaled.
But $140 billion?
Let's put that number in context even further, using what I call the "Google Relative Valuation Game":
At $470 per share, Google is worth:
More than one Cisco Systems (CSCO, news, msgs).
Half of Microsoft (MSFT, news, msgs).
Almost 10 Broadcoms (BRCM, news, msgs).
More than 40 Dow Joneses (DJ, news, msgs).
Three Walt Disneys (DIS, news, msgs).
One and a half AT&Ts (T, news, msgs).
And, as of today, one full Berkshire Hathaway (BRK.A, news, msgs).
Related news and commentary on MSN Money
The secret is out
Obviously, the market has recognized the incredible earnings potential of this company, and that is what has me increasingly worried about my long-held long position. Wall Street often extrapolates trends out much further and for much longer than any rational person would expect, as fear and greed really do drive so much at the market.
As Aaron Task noted in a dialogue with me early on Monday, you don't have to think back very hard to find stocks from the bubble of the late 1990s that dwarfed Berkshire Hathaway's market cap back then. My favorite memory is one he also highlighted -- "Internet incubator" Internet Capital Group (ICGE, news, msgs) -- which, at its peak in 2000, was worth just a little more than Google is valued at today.
Google is -- without a doubt -- no ICGE. Google is not built on hype and inflated dreams, as ICGE and so many of its brethren from the bubble were. This company, Google, isn't "going to" change the world. It already has, and there will be no going back from this world where Google is a major force in tech and media (and perhaps all kinds of other industries from finance to software).
But that doesn't mean it's a good stock to buy at $470 a share, despite my staying long it.
High expectations, higher P/E
I expect Google to earn far more in the next five years than the Street believes it will. But my most optimistic scenario would put earnings for 2007 somewhere around $13 a share (again, that's being extremely optimistic), and that gives Google a P/E of 36 times next year's best-case scenario earnings. Gulp.
Because I do have such high expectations for Google's long-term earnings profile, I'm sure not looking to pull the plug on my long. The business is on fire now and will continue to be so in 2006, and I'd much rather be long than short this name. But there's nothing wrong with taking something off the table after such a big run, and that's what I continue to do.
I didn't have as many Google calls as I would have liked during this last huge rally (do we ever have enough of the winners? No, of course not), and rather than selling them and/or rolling them up when they expired last month, I simply exercised them. I'd actually like to buy some Google puts here rather than just selling my common stock, but the premiums on the options in this name are simply outrageous.
Another strategy to employ would be to short some calls against my common stock. But with as much momentum as this stock has had -- and because the business has been so incredibly strong -- I don't want to fight Wall Street if it continues to run this stock higher in the near term. So I trim. And trim a little more.
By Cody Willard, TheStreet.com
At the time of publication, the firm in which Willard is a partner was net long Google, Cisco, Microsoft and Broadcom, although positions can change at any time and without notice.
Cody Willard is a partner in a buy-side firm and a contributor to TheStreet.com's RealMoney. He also produces a premium product for TheStreet.com called The Telecom Connection and is the founder of Teleconomics.com. The firm in which Willard is a partner may, from time to time, have long or short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in his columns. None of the information in this column constitutes, or is intended to constitute, a recommendation by Willard of any particular security or trading strategy or a determination by Willard that any security or trading strategy is suitable for any specific person.
© 2006 TheStreet.com, All Rights Reserved.
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