Yes, the Google price target brouhaha is reminiscent of the 90s--and not just with respect to dotcom stocks. The Dow, too, was the subject of a few heroic hypotheses in those days (Dow 36,000, Dow 100,000), utterances that, in hindsight, came to be viewed as preposterous, asinine, and irresponsible.
Unfortunately, then as now, many observers are drawing the wrong lessons from these exercises. The important lessons are not that analysts and investors are "cheerleaders" or "overexuberant," or often look boneheaded in hindsight. (Of course they often look boneheaded in hindsight. They're forecasters.) The real lessons are these:
- First, valuing stocks is a highly subjective exercise: There is a vast difference of opinion about the "fair value" of even broad indices like the S&P 500 (some respected analysts think it's cheap; others--even more respected--think it's at least 30% overvalued). With stocks like Google this uncertainty is so magnified that you could fly a 747 through a range of reasonable price targets.
- Second, no one knows for sure what stocks are worth. No one. If you don't believe this, get a spreadsheet, project a hundred years' worth of cash flows for Google, and discount them to the present. Don't forget that Google could end up like Microsoft or like DEC (very different cash flows) and that an appropriate discount rate--one that compensates you for the risk to the cash flows--could range between, say, 7% and 20%. When you think you're done, change your assumptions a bit and see what happens to the "fair value." Change them again. Eventually, you'll probably conclude that the stock is worth somewhere between $25 (cash per share) and $1,000. Now pick your price target.
- Third, a diversity of opinions about what stocks are worth (assuming the conclusions have well-reasoned arguments underlying them) is more helpful to someone trying to form his or her own opinion than simple regurgitations of the comforting consensus of the herd. Why? Because the consensus, unfortunately, is usually wrong. (When Google went public, the consensus was that it was overvalued at $85. Boy, does that seem ridiculous). I don't find the analysis underlying Mark Stahlman's Google-could-go-to-$2000 particularly persuasive, but I appreciate his reminding me not to automatically make the same mistake with the stock that almost everyone has since the IPO: underestimating it.
- Fourth, valuation is only one of many factors that drives stock prices in the short and intermediate-term (the timeframe that unfortunately obsesses the press, Wall Street, and most investors). Also, alas, valuation is practically worthless as a tool to try to figure out what stocks are going to do next.
- Fifth, there is no difference between raising a target from $450 to $600 and raising it $45 to $60, so don't get distracted by the extra zero. Warren Buffett is viewed as the pinnacle of reasonableness (deservedly), and his stock is trading at $89,000. Imagine the ridicule that must have rained down on the poor fool who predicted back in the 1960s that this might be possible.
- Sixth, analysts have to put ratings and price targets on stocks--that's their job. You don't. You can just say, "I don't know, and I don't care." (And when your buddy's ribbing you about how much money he's making in Google, you can also, perhaps, console yourself by saying, "And he doesn't know, either.")
- Seventh, yesterday's INSANE price objective might seem quite reasonable tomorrow. An analyst who slapped a $500 target on Google 18 months ago at the IPO would have been branded a crackpot. Same for an analyst who in 1982 said that the Dow would rise from 1,000 to 10,000 (or, in 2000, drop from 11,000 to 7,700). So let's not rush to dismiss as lunatics those who are calling for Dow 2,000 (down 80%), Dow 20,000 (up 80ish%), or Google $600.
- Eighth, relative valuation--assessing the value of a stock by comparing its multiple to that of other stocks--can, unfortunately, be a fool's game (It doesn't much matter whether a stock is cheap or expensive relative to another stock if the market crashes). Unfortunately, investors and analysts with time horizons shorter than 5 to 10 years usually don't have the luxury of focusing on absolute value.
- Ninth, even now, the most amazing thing about Google is not the stock price but the cash flow. Say what you will about the silly name and zooming stock, but a seven year old company is already generating nearly half as much cash as the biggest media conglomerate in the world. That's amazing.
- And, so, tenth, most price targets aren't worth anything like the hullabaloo that is often paid to them. They should be seen as arguments and hypotheses, not pinpoint predictions, and the best ones--the ones supported by well-reasoned logic and an impartial analysis of the facts--can be helpful for developing and refining your own conclusions.
So, now that we have collectively explored the upside case for Google, instead of another article about how Wall Street analysts are obviously going nuts again--or another analyst report about how Google might go straight to the moon--I'd like to read a well-written piece arguing that Google might go to zero. Not only because that's the only Google argument that I haven't heard in a while but because it's the only new Google call left.
Disclosure/Reminder: I don't own Google (unfortunately), I think it's overvalued, I think it could go to $600 or more or $300 or below, and please don't construe anything I say on this blog as an investment recommendation or advice (because it isn't).