Google – overpriced? November 29, 2006Posted by sk in Computers & Internet, Google, Microsoft, Technology and Software.
Dave Winer says Web Bubble Burst 2.0 will come about when Google’s stock crashes and that we’re safe as long as Google is doing well. Scoble believes there’s nothing that can stop Google. Even if the domestic market stops growing, he says there is a lot of scope for growth in international markets and as long as that potential exists, Google will continue to grow at alarming rates. He further goes on to say that Google is in the same position that Microsoft was in 18 years ago and we all know how far Microsoft has come. I guess he’s right too. For a long time Microsoft had just one source of revenues – Windows. Even now, about 90% of their revenues come from Office and Windows. Most of Google’s revenue comes from advertisements.
Speculators are having a field time predicting their next move. I don’t want to go down Will-Google-Get-Bigger-than-Microsoft lane here. There are many other bloggers who are devoting ample time, energy and resources in putting together those arguments… oops… posts!!! With due respect to their endeavors, let me proceed to my main point here. With Google’s shares trading at $489.50 currently, I have been obviously intrigued. Is it overpriced? Of course, yes! Duhh… stupid question??? So how overpriced is it? Is it overpriced enough to bring the entire market crashing down? If the prices were to climb up to $1000/share, then yes. Speculators would try to sell their shares in lots and cause rapid fall in share prices. Obviously, for this to happen, the volume of the stock controlled by these traders need to be substantial enough to cause any change in the price. But at what price will this happen? I don’t know! My guess is as good as yours. But I do feel that Google has the potential of bringing about a bubble, if not another crash.
I tried to calculate the Intrinsic Value of Google’s stock. This would tell me how much the stock may be worth depending upon the current earnings of the company. Even though this is not a definite yardstick for quantifying whether the present market price is good for investment purposes or not, it will definitely give you a good idea regarding your position. Of course, all these calculations require a great deal of discretion on the part of the investor to make a rational and educated judgment.
So how do I achieve this task? Simple! I followed the time and tested rule of using the Earnings Per Share (EPS) and the annual returns of stocks. For the annual return of stocks, I used the Geometric Average of Stock Returns from 1929-2005. This was around 9.69%. I know that this is not a precise figure, but this is the closest to what I want to measure.
Okay, so here is the actual calculation. PRECAUTION: Read the next few lines at your own risk and PLEASE PLEASE do not use swear words when you see the actual figure!
Intrinsic Value= EPS (2006)/Annual Return
I got the EPS value from Reuters Website. Yes, $79.25 only!!!!
Hmmm….do you want to invest now? I still would… only if I had the money!
(with inputs from cotton)