Beware Flimsy Google Logic

Of course, while we're saluting analyst cojones, we should also be wary of some common-but-flimsy bull logic (regarding Google and others):

1) Great company.  Yes, it's a great company.  Unfortunately, there's a difference between stocks and companies, and the only relevant question is whether the company's "greatness" is or isn't already priced into the stock.

2) Best company in the sector.  Relevant if you're a top-down asset allocator who has to own some Internet stocks; irrelevant if you're a bottom up investor: What if the whole sector goes into the tank?

3) Gaining share.  Once you already have 50%-plus of the market, this is actually a negative--There's just not that much share left to gain.

4) Only 25-times EBITDA. Fair if the company will grow EBITDA 30% a year for the next five years, expensive if it doesn't.  15-times EBITDA would be a fair multiple, too, as would 40-times.  All depends on that elusive future growth rate.

5) Strong fundamentals.  Same problem as No.1: Are these strong fundamentals already priced into the stock?  And same problem as No. 4: What if the fundamentals become less-strong?  Many Internet companies in 1999 had FABULOUS fundamentals.)

6) Barron's concerns, click fraud concerns, etc., are obvious and nothing new.  As an investor we respect says, "It doesn't matter until it matters."  Just because everyone's been aware of a concern for years doesn't mean it's not a concern.

And, while we're needling, let's be fair and acknowledge one of the many challenges that analysts face, namely, having to be all things to all people.  A "buy" for one investor will always be a "sell" for another, and analysts don't have the time or information necessary to spell out which is which.

Comments

[mikey]

henry,

what do media companies trade for in terms of multiples of cash flow typically?

25x doesn't sound like much now. What is the cash flow multiple of MSFT, CSCO, other tech leaders now?

[rem]

Paul Kedrosky of http://paul.kedrosky.com/ pointed out that (and I agree) the Time article on Google might be actually more bearish than Barrons':

"Perhaps this is just me, but I found the Time magazine puff piece on Google this weekend much more bearish than the _intentionally_ bearish Google hit job by Barron's. The company (implicitly) brags to Time about turning down a low cost new $80mm revenue stream, brags about its obfuscatory strategy, demonstrates capriciousness in how it analyzes opportunities, and continues to generally show an over-reliance on centralizing all decision-making in its ruling triumvirate."

[Victor]

That Barron's article was the most atrocious bit of market manipulation i've seen in a long time. At the close of market on friday afternoon goog had dropped significantly, obviously because insiders aware of the article got their sell orders in before everyone else. The stupidest thing is that the article just rehashes risks that people already know about and makes the blindingly obvious statement that if a company misses earnings by 20% their stock will be hammered. Uh, what about giving the other case? What if they beat by 20%? Surely that's not possible. It's never happened in the past has it?

[fCh]

All in all, this is a healthy change in perspective; some people have been stating the obvious for a while. A story like the one in Barron's only adds some objectivity to the picture--since the preceding others might have been construed as biased or simply lacking authority.

http://chircu.blogspot.com/2006/01/can-search-follow-browser.html

[Henry Blodget]

On the media multiples question... "Cash flow" is often taken to mean either EBITDA, which isn't really cash flow (because it's before capex) or Free Cash Flow, which is. EBITDA, in my opinion, is almost meaningless, but everyone uses it, so here goes:

Per some recent Merrill Lynch numbers, the big diversified media conglomerates, newspaper companies, and general publishers trade at about 8x-11x 2006E EBITDA. The Internet group average is about 16 times, with Google by far the highest at about 20x projected 2006E. The Internet multiples, including Google's, are not out of line if one believes the current projections. But of course that's a meaningful "if."

[ugurss]

thanks admin good post
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