Sunday, October 14, 2007

The Price of “Insanity” Doubles: Barron’s vs. Google, Part 1

When it comes to Google, Barron’s readers can give the publication high marks for beating its head against the wall, if not for stock-picking.

This weekend’s issue of the famously skeptical weekly includes yet another attempt to shoot Google off its perch as the most innovative, useful and, consequently, valuable internet property on the planet, with yet another article highlighting the high stock price and seemingly mindless valuation of an enterprise less than ten years old:

As Its Stock Tops $600, Google Faces Growing Risks.

Google closed the week at $637.39, more than 50 times its earnings, giving it a market capitalization that nearly equals the total value of the three largest traditional media companies: Time Warner, Walt Disney and the News Corporation. Even at Google’s current stock price, 34 of the 38 analysts following the company have buy recommendations, according to Thomson Financial.

—Barron’s, October 15, 2007

If that general argument sounds familiar, it should.

It’s almost exactly the same theme of Barron’s previous negative piece on Google, which came out not quite one year ago after Google’s share price hit $500.

That article was called “Google: 500 Reasons to Worry,” and it started with the following familiar refrain:

GOOGLE HIT ANOTHER MILESTONE LAST WEEK, topping 500 a share and closing at 505. The shares (ticker: GOOG) have soared since the company posted third-quarter results far above analysts' estimates. Amid the euphoria, however, investors seem to have ignored the stock's exceedingly rich valuation -- it trades for 37 times next year's expected earnings -- and arguably more important, Google's slowing growth rate.

Unless the company's efforts to move beyond its core search franchise begin to pay off handsomely -- it recently shelled out $1.65 billion for YouTube -- our bet is investors will wake up and smell the coffee -- just as they did with (AMZN) and eBay (EBAY), which fell precipitously from their highs.

—Barron’s, November 27, 2006

Obviously, whatever coffee investors smelled when Google was at $500 did not wake those investors up to the dangers Barron's saw in the shares. But that was not the first time Barron's had tried to warn the masses against Google's purported overvaluation in the marketplace.

Barron’s500 Reasons to Worry” came not even one year after Barron’s previous negative piece on Google, which hit the streets when the shares were trading for $360 apiece:

To get a sense of what might happen to the stock, we gave one über-bull's 2006 revenue estimate for Google a 20% haircut, trimmed his projected expenses by 5% (but no further, because bulls greatly underestimate Google's costs), deducted stock-based compensation and, generously, gave the company credit for the considerable interest income on its cash.

The result: Earnings would be 30% lower than the bull's projection, at $6.28 a share. If the stock were to maintain its current multiple of 41 on those lowered earnings, it would be worth $257. It's more likely the multiple would shrink to as low as 30, in line with the slower growth. That would make the stock worth $188, versus its recent $360.

—Barron’s, February 23, 2006

As a reminder, Google shares ended this past week at $637.

While, as a rule, NotMakingThisUp never comments up or down on the valuation of particular stocks, we provide the above selections from the previous Barron's articles simply to put this weekend's windmill-tilting against Google in perspective.

Furthermore, we observe that this weekend’s write-up features, as did each of the previous write-ups, a damning quote from Fred Hickey, Barron’s Roundtable member and frequently quoted Wall Street bear.

Fred Hickey, editor of The High-Tech Strategist newsletter in Nashua, N.H., is one of the few willing to call Google’s stock surge “insanity.” But even he isn’t predicting when it might end. He has placed a tiny bet against Google, but no more. “You cannot short a mania,” he said.

In “500 Reasons to Worry,” Hickey provided a similar commentary, with somewhat more assurance in his conclusion:

Fred Hickey, editor of the High-Tech Strategist newsletter and a Barron's Roundtable member, is convinced the consumer is slowing, as evidenced by declines in home sales, auto sales and recent sales trends at Wal-Mart (WMT) and electronics retailers. He expects the slowdown to hurt Google's advertising and stock price, too. "I know (Google stock) isn't worth $500 a share," he says.

He also said as much in the earliest Barron’s story, with the stock at $360:

"Google reminds me very much of what went on in 1999 and 2000," says Fred Hickey, editor of the well-regarded High-Tech Strategist newsletter and a member of the Barron's Roundtable. "The valuation is insane, relative to what they do."…

"You have a frenzy for ad words that could disappear," warns Hickey. And that makes him unwilling even to take a stab at what Google's revenues will be or what the stock is worth.

By my calculation, the price of Hickey’s “insanity” has almost doubled in the last 18 months—from $360 to $637 per share.

Now, whether Google’s share price will continue its recent rampage, we offer no opinion. Never have, never will.

Our focus remains, as always, on whether a company and its management team are doing what they say they do—not whether a particular share price is attractive, unattractive, or likely to move up, down or sideways.

It has, however, been an amusing spectator sport watching Wall Street’s Finest leapfrog one another’s “price target” for Google’s shares during the latest surge, although it’s not quite clear why all of a sudden the analysts are finding greater value at $600 per share than they did when the stock traded beneath $500 a few months ago.

Actually, I'm making that up.

It’s very clear why the analysts are fighting to pick the highest price target: quite simply, Google’s stock has been moving up, and there’s nothing worse to one of Wall Street’s Finest than watching from the sidelines while the shares of a widely-owned, widely-admired company rally without them.

In Part II we will look not at what Barron’s has focused on—Google’s share price and current earnings multiple—but on the business end, to perhaps help befuddled Barron's readers understand why Google continues to be the search engine of choice to internet users.

And, therefore, to the advertisers who depend on it.

In that way, those readers can make their own judgement as to whether the price of both Barron's and Fred Hickey's so-called "insanity" will keep rising.

Jeff Matthews
I Am Not Making This Up

© 2007 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


Barry said...

Predicting the future is a hard business to be in. It should only be attemped by Elaine Garzarelli, Joe Battipaglia and weatherpersons. Fred Hickey, Barrons and the crack staff at "Not Making This Up" exist for entertainment value only

cargocultinvestor said...

Obviously they have been wrong thus far.

On the other hand it’s easy to understand their scepticism. I too am mystified by Google’s success. It is a fantastic search engine without a doubt and that is the problem. I use it daily. I have found and researched products using Google search and subsequently purchased them from a dealer identified as the most competitive using, again, Google search. Who pays Google to advertise does not enter into the decision. Google itself makes advertising on Google worthless if the target is someone like me. Why would that not be true for any sentient being? Is it laziness? Is it stupidity? I have no idea. I also have no idea why any corporation would spend the money they do advertising on Google. But they do. Go figure.

Anonymous said...

"Our focus remains, as always, on whether a company and its management team are doing what they say they do—not whether a particular share price is attractive, unattractive, or likely to move up, down or sideways."

Jeff: Maybe the third time's the charm that causes GOOG's stock price to finally fall?

Seriously, though, you're absolutely right in the post above. When the management of a company fails to do what they promise (yes, that means YOU Terry Semel, formerly of YHOO, promising to significantly increase revenues from Project Panama and then failing to do so), the share price of the company will suffer.

I, like many others who read Barron's, got blindsided by simply, solely focusing on price and not the other underlying dynamics that can affect the share price of a company like what you mention above.

For what it's worth, I cancelled my online subscription to Barron's last week. Guess I'm better off doing my own analysis and not be as skeptical like the editors at Barron's.

Who knows, maybe Murdoch can turn Barron's around by sacking some of the long time bears like Alan Abelson and install some new bullish editors to juice up its readership?

Dale said...

Beating up on both Barron's and Fred Hickey isn't even sport these days. Why is Hickey even on the Roundtable?

Sam E. Antar said...

"...there’s nothing worse to one of Wall Street’s Finest than watching from the sidelines while the shares of a widely-owned, widely-admired company rally without them."

Herd mentality illness on Wall Street again.

As crooks, we at Crazy Eddie loved when Wall Street felt "left out" as they scrambled to buy up more shares and bid up the price of Crazy Eddie stock.


Sam E. Antar (Crazy Eddie CFO & convicted felon)

PS: I am NOT making this up.

Tracy said...

You don't understand why any corporation advertises on google?

If that's the case, you don't understand google at all. Or advertising.

Google has single-handedly revolutionized advertising for companies of all sizes. Their adwords slogan captures it perfect - 'it's all about results.' With Google Adwords, I can see exactly which ads work and which ads don't work in real time. I can tell which keywords work and which ones don't, in real time. Google allows companies to correct for the old ad metaphor - half of an advertiser's budget is wasted, you just can't tell which half.

As an advertiser who spends millions a year on advertising generally and millions on google in particular, I can tell you that google offers much better transparency and results than any other medium.

Jeff Matthews said...

Tracy, I understand very well why corporations use Google. I'm not sure I understand how you got that impression from this piece.

But our follow-up will lay to rest any ambiguities you took from it despite the fact that we pointed out how wrong both Barron's and Fred Hickey have been--to their readers' detriment.

Philip said...

My roommate runs a small company, and Google's tools for targeting your ad dollars and measuring how well they do are just amazing. But I don't think they are $630 a share amazing. I would love to own some of this stock, but currently Google's price is like the real estate bubble: it is ridiculous and must come down. Combined with living near Google and knowing many of their employees. They are absolute spendthrifts who probably have their day of reckoning ahead. But in the end, there is plenty of business to be had in their core business, it is just these time and money wasting side enterprises and the absurd stock value that have to go.