Why Oh Why Can't We Have a Better Press Corps? (Google at $300 a Share Edition)

In order for anybody to believe that it is worth paying $300 a share for Google, they must believe that:

Google's profits will quadruple from current levels in the next several years, and thereafter it will continue to grow at a very healthy pace--a healthy enough pace to earn a rate of return of 5% per year or more on reinvested profits.

Or:

Google stock can be sold in a couple of months to a greater fool who will pay more than $300 a share.

If you were a newspaper reporter writing a story intended to inform those concerned about making profitable investments, your story would lay out the current high price-earnings ratio of Google--70--and sketch out the likelihood of various scenarios for Google's future sales and earnings growth. It would talk about the likelihood of Google's erecting powerful enough barriers to entry to preserve its current high margins--35% of revenues. It would talk about the plans of potential competitors to grab some of this high-margin search gravy train, and whether Google's margins might be forced down as a result.

Gary Rivlin of the New York Times tells us absolutely nothing about this. He doesn't care enough about informing his readers to even get the most important and interesting measure of Google's current valuation--its price-earnings ratio--into his article. It wouldn't be hard. All he'd have to do is to say that Google is valued at as much as Time-Warner although Google has less than one-third the profits, less than one-eighth the sales, and something over three times the profit margins, and ask his interviewees to assess the likelihood of scenarios in which Google's profits are as big as Time-Warner's.

But that's not even a minimal priority for Mr. Rivlin and his editors:

At $300 a Share, Google Looks Pricey and Still Irresistible - New York Times: By GARY RIVLIN: [H]ow do you embrace a stock that has more than tripled in 10 months and cracked the $300-a-share barrier so quickly since going public that much of its growth potential seems already built into the price? In early May, when Google was trading for $236, Mr. Edwards sent a note to clients of his firm, a group that includes wealthy individuals and money managers, recommending that they buy Google stock. But Mr. Edwards, who has been analyzing publicly traded stocks for two decades, acknowledges that Google has him flummoxed now.... [M]any of his counterparts, including those working for more prominent investment banks, continue to recommend the stock.

Heath P. Terry... Credit Suisse First Boston... raised his target price to $350.... Mr. Edwards... describes himself as stumped.... He does not have the conviction to advise clients to buy the stock, nor is he pessimistic enough to advise them to sell. "Let's just say if I was owning Google stock right now, I'd be selling some," he said....

[E]venome of those who were bullish on Google when it went public in August, at $85 a share, wonder if investors have forgotten some of the lessons of the 1990's.... John Tinker... ThinkEquity... uses the "B" word - bubble - when describing the market's giddy embrace of Google, even as he has a price target of $330 on Google....

Comparisons are also being made between Google and Time Warner, another company deriving the bulk of its revenue from advertising. Time Warner had a market capitalization of $79.19 billion at the close of the market on Monday, below Google's though it posted first-quarter revenue eight times that of Google, and profits about three times as large....

Any number of theories might explain the most recent run-up in Google's stock, which has risen 67 percent since April 1. Those range from data suggesting that Internet advertising revenue is rising by as much as 40 percent a year - a trend sure to benefit Google - to a herd mentality among mutual fund managers ready to declare that resistance is futile: to post the kind of returns that would put them in the upper echelons of performance tables, they need to own shares in Google....

Mr. Terry of Credit Suisse thinks that even at its current price, Google is still worth buying, noting the company's aggressive moves to extend its core search business. On Monday, for example, it announced a new bit of software called the Google Video Viewer, complementing its effort to encourage users to submit their own video to its database and adding a "search within the video" feature.

John Battelle, the author of a book on Google called "The Search," to be published in September by Portfolio Hardcover, says it is only natural that people want to believe in Google.... "If you really believe in something, you're looking for a place where you can prove you were right the first time," he said. "And Google is such a place."

Comments

[nathan]

How about stock talk based on macro-economic insight?

How do savings, investments and deficits point to investment opportunities?

Is now a good time to invest in Asia? If so,
-which parts of Asia?
-what about Japan?

[Nathan]

Does Prof DeLong or anyone else know of specific hedge funds based on a macroeconomic strategy?

I can see why a good investor will not explain the thought process behind decisions until he or she is no longer in the business. There may be no thought process anyways - beating indexes may be rare and may be random and luck.

Part of Google's value is not what they do currently (search engines) but what they might do new in the future.

[MTC]

Oh please, it is The New York Times. When did "the paper of record" ever have anyone on staff who had the least insight into money, markets or economics?

The New York Times style guide (somewhat abbreviated):

"Golly, a controversy exists. Mr. A says A. Ms. B, on the other hand, says B. Wouldn't it be great if everyone could just get along? That's a wrap, folks."

[Barry]

As the saying goes, the articles are just there so that the ads don't rub against each other.

[kharris]

I understand that your bigger beef is with economic reporting. Business reporting in major US dailies, while hardly stellar, is often better than economic reporting. This is neither. This is financial reporting, which is frequently abysmal. This is no surprise. A very large number of people in the financial industry think about financial investment in ways similar to what is in the offending article. Recommend sell. Recommend buy. Either way, you collect a fee.

[chris]

I always thought Gretchen Morgenson and Floyd Norris are definitely worth a look.

Google was way too high at $200, shows there's still a market decline and perhaps a severe recession ahead, I mean recession plus inflation.

[jerry]

I hear what you're saying, but I need to point out that tenured finance Professor Spiegel over at Haas demonstrated to all of us MBA students, very convincingly in 1997 that there were no speculators in the stock market. The greater fool theory is completely incorrect.

Yes, by trying to auction off a dollar in class, and failing to find anyone that would buy it for more than say, a buck, tenured Professor Spiegel demonstrated, nay proved to us all that stock prices are based on the intrinsic underlying value of the company they represent, and not on the possibility of flipping it soon to the greater fool.

I had graduated before I was able to hear how the finance department at Haas (previously potentially responsible for the 1987 Stock Market Crash itself!) was able to explain the decline....

Anyway, you may wish to rethink your theory.

[Big Al]

Thereis so much nonsense on the Idiot box that people will believe anything that is well scripted.
Jerry, if he had told you he had a large piece of crystallized carbon in a box, shaken the box, so you could hear it bang about, how much would you have bid?

[anne]

There is every reason to push the New York Times, as Brad so well does, to improve and improve. But, the paper is generally superb and from colleagues to students the sense is that reading the Times is a joy. As a marine major who had been my student assured me, unasked, a few days ago, "don't worry, I read the Times every day."

[anon e mouse]

Unfortunately, remarking that the price of Google is too high is probably not PC in New York City, and the NYT is too PC.

[diddy]

Google is going to $470 based on forward PE! [/cramer]

[kmeson]

Doesn't the fourth paragraph exerpted say (close to verbatim) what you say it should? Perhaps I'm missing something...

[Thomas]

Not just the NYT. I heard a so-called analyst on Bloomberg news say that people should buy google becuase they saw it going even higher, perhaps to 500 a share. What kind of idiots hire these people?

[anne]

After reading the article carefully again, I really have no complaint. The points suggested for the article do appear to be made. What am I missing?

[chris]

Plus it is the national soapbox for Krugman. And they have Maureen Dowd who often makes me laugh though at this blog she comes under criticism. The business pages often have good stories but following after what is on blogs or in some newsletters. (all this trying to stick up for the NYT) On the domestic governance front perhaps they are gutless wonders now.

the shocker question when google was at $200 was why it's worth $54 billion, so now it's up to $75 billion or so just for a web site. I. U. can run farther. This is one I'd like to try to short. Lemmings over the cliff.

[T-do]

Three quick points: First – it’s true Google is way overrated – but boy I wish I had got on that train 10 months ago!

Secondly, I agree with anne – yes, the article didn’t go into detail about p/e ratio and earnings projections but the gist of the article is still “what the crap are these people thinking?!”

That said, it is a sad state of affairs when the only paper you can turn to for quality business news is the WSJ – reading parts of that paper is a borderline act of masochism. But I think the key is that the two papers serve completely different clientele – the WSJ for finance and econ nerds (and right-wing ideologues), and the NYT for - well, everyone else. My ideal paper? WSJ’s Politics and Policy and Money and Investing sections, the NYT’s international coverage and op-ed pieces, plus the Denver Post’s sports page (once the NHL starts again. Go Avs!).

[chris]

Sorry, I'm going to dump an entire article from the NYPost, the Faux empire.

UGLY COMBINATION
By JOHN CRUDELE

June 28, 2005 -- THE fact that stock prices fell so sharply last week should be frightening enough. But what should really scare investors is that Wall Street was desperate to keep the market from doing what it did — but couldn't.
In the real world the second quarter of 2005 ends at midnight Thursday. But for many professional traders, only the results achieved as of yesterday count toward what they will report to clients because it takes three days to complete — or, as they say, "settle" — equity trades.

What happens this time each quarter is quite ritualistic: The pros try as hard as they can to keep stock prices from weakening and they hope that the real world doesn't interfere with their little game.

Unfortunately, this time a combination of a (foolishly) hostile Federal Reserve and a weakening economy, along with the specter of a continuing rise in fuel prices, proved just too much to overcome.

And now the real difficult period begins.

With lots of fundamental factors going against the market and the corporations it represents, and with many traders likely to leave town for the summer, the stock market could be in for quite a bad stretch — perhaps for as long as months at a time.

The Dow Jones industrial average gained 268 points in May and added another 80 points in early June. Those aren't tremendous gains but they were welcome because Wall Street had been expecting a good year (although I could never understand why).

That gain was quite predictable, as I said in a May 19 column. The pros were due for a little market-manipulating in anticipation of their quarter-end escapades.

But Wall Street is now back to the scary reality I mentioned in an April 21 column. The economy appears to be slowing (even if you use the optimistic statistics manufactured by Washington) while inflation is still growing (even if you believe the faulty government measures of it).

(An aside: It's nice for those of us who know better to notice that even The New York Times, in this past Sunday's edition, took the government to task for the way it measures inflation, especially in housing costs. It may be a decade late, but it's nice all the same.)

Not helping the stock market's cause is the Federal Reserve, whose policy-making Open Market Committee will meet on Thursday and probably announce its ninth consecutive interest rate hike. The Fed won't say it in so many words, but its real concern is the unchecked rise in housing prices.

Each new rate hike has put the nation's banking system further into uncharted territory because the financial markets have ignored the Fed and kept interest rates low.

Which gets us to the last and probably the most dangerous situation for the market: The Federal Reserve appears to have lost its power to do anything about the economy or inflation.

In technical terms that means the Fed and its Chairman Alan Greenspan are in a conundrum. In laymen's terms it's one of those, "Oh, crap, who's in charge?" sort of situations.

jcrudele@nypost.com

Exactly, W and Alan sitting in a tree.

[Nathan]

Some of the business news\analysis is pretty interesting at the NYT. Maynard has written a couple noteworthy articles.

http://www.atca.org/singlenews.asp?item_ID=2100&comm=0

[Nathan]

how do you think interest rate news\guidance from this week will affect stocks?

do you think the fed will raise? how much? what will the guidance be for the future? (more raises, constant, vague)

[Kuas]

It must be killing Henry Blodget, wherever he is, that he can't announce a $1,000 price target for Google.

[paulo]

As someone who has been there -- reporting on the prices of listed companies -- Your criticism, and those who rang in on your side, are off base. There are thousands of punt sheets out there who can give you buy or sell recommendations from the writer. In this case, the reporter didn't put his own view on the line -- a really dangerous thing for a stocks reporter -- but got the warnings and the silly buy forecasts all in the article. It's all there, even without the p/e. Yes, he could have laid out the p/e and growth prospects, and turned it into a statistical analysis that might not be read. And after all, all the critical assessments of the Google IPO stock price have been wrong; any reporter who heavily weighted his article on the critical side back then would have appeared foolish to a lot of people.
In this case, simply asking if Google was its own tech bubble is enough. The NYT, after all, is a newspaper for the thinking masses and not economists. It has to make things readable. Perhaps Brad, Anne etc read far too fast.

[paulo]

Correction: meant Kharris in previous post, not Anne -- who rightfully understands the NYT's value.

[A. Zarkov]

GOOG has a float of 173.53M shares, which is 62% of the shares outstanding. That’s a pretty low float, but nowhere near as low as some insanely overpriced tech companies in the go-go days circa 2000. When a stock’s float is low, it’s hard for the market to short it to correct the over valuation. Then there are regulatory barriers to short selling. GOOG has 9.64M shares sold short which is 3.5% of the float. Compare to Yahoo where 6.3% of the float sold short. If GOOG is so overpriced then why don’t we see more short selling? I think it’s overpriced, but I think most every thing is over priced these days.

Google’s high P/E is implicit in Rivlin’s article, and I think DeLong is being overly critical here. After all it’s just a newspaper, not an article in The Journal of Finance.

[rev]

jerry,
in Professor Spiegel's experiment, you have perfect information of the intrinsic value of the underlying asset. In the stock market, you have asymmetric, imperfect information. His experiment does not disprove the greater fool theory.
- rev

[anne]

Brad DeLong:

"In order for anybody to believe that it is worth paying $300 a share for Google, they must believe that:

Google's profits will quadruple from current levels in the next several years, and thereafter it will continue to grow at a very healthy pace--a healthy enough pace to earn a rate of return of 5% per year or more on reinvested profits."

http://www.nytimes.com/2005/06/28/technology/28google.html

At $300 a Share, Google Looks Pricey and Still Irresistible
By GARY RIVLIN

"Google, based in Mountain View, Calif., had more than $3 billion in revenue last year, almost all from its advertising business, and its profits have increased more than sevenfold since July 2004."

[anne]

http://www.nytimes.com/2005/06/28/technology/28google.html

"Any number of theories might explain the most recent run-up in Google's stock, which has risen 67 percent since April 1. Those range from data suggesting that Internet advertising revenue is rising by as much as 40 percent a year - a trend sure to benefit Google - to a herd mentality among mutual fund managers..."

[Anita Hendersen]

People need to look at where Google's revenue is coming from and whether that source will grow. They make their money from advertising, and they have been increasing the number of affiliates in their advertising program in an attempt to increase revenues. This has led them to sign up a lot of dodgy partners. Advertisers are increasingly unhappy with Google's advertising service, which is called AdWords. The amount of fraud in some markets is out of hand. My biggest client spent $1 million at Google last year, and the rate is running about 20% below that this year. Smaller clients are likewise not increasing spending. Google may be able to sign up more advertisers and more affiliates, but I don't see how they are going to increase revenues from this source at any rates that justify a high PE ratio.

[Yamston]

I didn't read that article because most of what that
reporter writes is just updates on once-highflying,
then-humbled, now-resurgent folk from Silicon Valley
boom days in the 90s that no one outside of San Jose
cares about.

Now that I've criticized him personally, onto the
article. Indeed, omitting the price-to-earnings ratio
was important, but only if the point of the article is
to make you want to buy or sell Google stock. And
since this isn't Barron's magazine, let's say that's
not the point.

The really striking omission is that one of the
analysts he quotes, Heath Terry of Credit Suisse First
Boston, who thinks the stock will go EVEN HIGHER,
works at the brokerage house that managed Google's
initial public offering. He is the equivalent of a
Ford dealer saying, "Oh yeah, this year's fleet of
trucks is really worth buying, oh sure." It would be
nice for the reader to know where Mr. Terry is
a-comin' from in his Ford Fiesta.

And what is John Battelle doing in here? He's the guy
who drove the Industry Standard magazine into the
ground and now he's a pundit?

[me]

"Google is going to $470 based on forward PE! [/cramer]"

Has anyone done a study to see if you would have made more money shorting cramer's picks?

[anne]

Kramer is a momentum player, and though he prefers to be right of course he trades the moment he believes he is wrong.

[Steve]

Cramer's picks seem to be roughly 50-50:

http://www.cxoadvisory.com/blog/reviews/blog6-29-05/

These are "sense of the market" calls rather than individual stock picks; I have no idea whether anyone's studied those, although his piece attacking Warren Buffett as outdated and Berkshire Hathaway as worthless to own did manage to arrive, almost to the day, at the 10-year-low for the stock.

[nk]

Hedge Funds Based on "Macro":

There is a book called "Absolute Returns" (Ineichen) that covers the hedge fund industry, including "macro" funds. You might read it yourself and see what you think.

Prof DeLong raised interesting points on Google's valuation.

[Redleg]

Jerry,
It seems that your Prof. Spiegel's example is a poor illustration of investment and therefore doesn't prove squat about the greater fool. Spiegel tried to auction a dollar in class- the dollar has a set value that each person in the class knows (sure, sure, you say a dollar has subjective meaning too).

With stocks, people do not know the underlying value of the firm- in fact, many fools don't even care to know- all they need to know is that if the share prices start to turn south, some rube somewhere may be willing to buy.

Investors should try to learn about the firms of which they own stocks. Hey, something as rudimentary as a P/E is not all that hard to figure out. I would also suggest looking at the firm's competitive situation and the firm's strategic plan (at least what they have articulated). Of course it's much easier to follow the herd and invest in stocks others are buying and to count on the greater fool to save your ass when things go bad.

[nk]

http://www.redeyechicago.com/

"High Tech Bust" - cover of today's "Red Eye"

[nate]

how does Google's valuation compare to Microsoft's current valuation?