A little over three years ago I wrote a piece titled, “Everybody Loves Google.” At the time the stock was trading at $300 per share and, although I loved company, I couldn’t get behind the stock’s valuation:
You know a product has “made it” when it’s added to the popular lexicon. For example, we don’t use a bandage on a booboo; we use a band-aid. People don’t order a cola; they order a coke. And when we want to find more information about something we don’t say, “do an internet search.” We say “google it.”
Google has “made it.” People love the search engine. They also love the email and mapping services Google offers, too. I love the free software and hosting service Google offers for this blog.
And investors love the stock.
At the current price of $300 per share, investors love the stock enough to give it a multiple of over 80 times its earnings of the past 12 months. (This compares to roughly 30 times for Yahoo! and 25 times for Microsoft.) Jim Cramer, of CNBC’s “Mad Money” fame and a prominent Google-lover, recently argued that the stock is actually undervalued and should trade closer to $400 per share.
But I think that the most enlightening way of looking at Google’s valuation is to look at its total market capitalization of $82 billion. For purposes of comparison, let’s look at the valuation of a few other media companies.
Omnicom, the largest advertising agency in the world, carries a market cap of $15 billion. Gannett, publisher of 101 daily newspapers including USA Today and owner of 21 television stations, is valued by the market at $18 billion. Yahoo!, probably Google’s closest competitor, trades for $48 billion. Put all of these together and they still don’t add up to the current market value of Google.
Another interesting comparison can be made with Time Warner. Time Warner, one of the largest and most successful media companies in the world, carries a market capitalization of $77 billion, or $5 billion less than Google.
Remember that Google’s main business, its only real profit engine, is search (actually the advertising revenue attached to the search engine).
Time Warner, a media behemoth, owns, among other businesses, Warner Brothers and New Line Cinema, creators of the Lord of the Rings and Harry Potter movies. It also owns the HBO, TBS, TNT, CNN, CNN Headline News, the WB, and Cartoon Network television channels. In addition, the company owns Time Magazine, People, Sports Illustrated, Entertainment Weekly, Fortune Magazine and one of the largest cable television providers in the country. And I shouldn’t forget to include that other little internet company owned by Time Warner, AOL.
Comparing the two companies, any rational person would have to say that Time Warner is a much more valuable company simply for the diversity and competitive strength of their individual businesses. Or take our hypothetical conglomerate of Omnicom, Gannett and Yahoo! I can’t imagine anyone, besides madman Jim Cramer, truly believing that Google could be more valuable.
In contrast to Cramer’s $400 per share price target, John Hussman, one of the smartest investors I know of, has written that he can’t find any way Google should be priced over $30. This difference of opinion, of course, is what makes a market.
One of these guys, however, is wrong.
It comes down to this: either all of our comparison companies are drastically undervalued or Google is drastically overvalued. And if you believe the former to be true, I’ve got a boatload of stocks to sell you.
That doesn’t change the fact that Google has a great product. I love Google… just not its stock.
Well, I’ve since had a change of heart. Today, I bought the stock… at $300.
Three years ago I thought the stock price was crazy; today, with the stock price virtually unchanged (and after quadrupling revenues and adding over $10 billion in cash to the balance sheet), I’m crazy about it.