On Barrons' Analysis of Google $500

Pretty good, actually, although it's hard to be agog and appalled about a 37-times-forward earnings multiple (43-times if you include the stuff that analysts should be including).  The key point in the article, which many Google boosters miss, is that continued deceleration will lead to continued multiple compression, regardless of how amazing a company Google is. 

40-ish times earnings/cash flow for a steady-state 40%-plus grower is fine, but in the face of ongoing deceleration, the 40x could easily go to 30x or 25x--or, worse, if Fred Hickey and others are right and American consumers are finally deciding not to buy everything they see.  Even a 30-times multiple would put Google under $400 again.

Comments

[sufiy]

http://sufiy.blogspot.com/2006/10/hard-data-on-google-bear-case.html

[troll]

Oh how quickly you change your strip now that you are not an analyst. GOOG trading at "43-times if you include the stuff that analysts should be including." Now I am sure if you were an analyst today you would exclude these items also because you just want to push what the companies are telling you to push.

[Henry Blodget]

No, actually, I don't think I would. I've changed my mind about stock-option expensing, for example (I used to be in the "options aren't an expense" camp, but no longer). The trouble analysts face, though, is that the reporting agencies--First Call, etc.--generally eliminate you from the database if you don't go along with the herd. Faced with the prospect of being eliminated, most analysts go ahead and publish numbers the way everyone else is publishing them.

On Google, I think the most meaningful valuation metric is cash flow. Some of the stock-based expenses SHOULD be eliminated (the pre-IPO grants), but as soon as you get into eliminating some stuff and not others, then adjusting for taxes, it gets so subjective as to be meaningless. Cash flow much simpler here.

[sufiy]

We always need someone to tell us: "it is time", problem here is that everybody suddenly become awaken to apparent stupidity of existing perception of value in the face of reality which always has been here just nobody pays attention to it. And the game "find another fool" is getting to its logical end...

http://sufiy.blogspot.com/2006/10/googles-growth-is-slowing-dramatically.html

http://sufiy.blogspot.com/2006/11/google-barrons-ends-party-in-bubble-20.html

[Jonathan Almy]

Regarding my post on seekingalpha: "Personally I would reconsider blaming Barron's for hitting Google Monday. Many companies fell with even better fundamentals only because they got caught up in Monday's undertow. Institutions don't follow Barron's in order to make portfolio adjustments."

I do not consdier Google a safe investment long-term because the barriers to entry are minimal - just ask Microsoft or Ask.com.

Also, no matter the circumstances, if the general market is gearing up for an economic 'low blow' than Google's proclivity is an even futher loss in market value which I am sure you are aware of post 2000.

[Victor]

Ha, another Barron's hatchet job. THey get these articles out after friday afternoon when all their cronies have got their short positions in. They've done this a few times in the past. And as with the past, they'll be wrong again. Google's growth *is* decelerating, but it won't do so discontinuously.
It's not going to go from 80% to 30% in one year.
I expect that we'll see 50%+ in 2007, 40%+ in 2008 and 35+% for a few years after. There's still a lot of secular growth left and national economic factors aren't yet coming in to play. You just need to speak to some of the advertisers using the system to realize this.

[joe]

DNA has been having multiple compression for the past several years... they handled it very well.

http://finance.google.com/finance?q=dna

(and why is it okay for inferior companies to trade at higher multiples, and be called 'undervalued'... like Yahoo... but Google, the best of breed, trading at lower multiples, be considered 'overvalued'. Google deserves, and has earned, a higher premium valuation.)

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