Don’t go gaga over Google by Geoff Colvin, Fortune senior editor-at-large:
we need to remember that the ringing superlatives are based on a stock price that’s nuts. Google is a terrific company that may one day deserve to sit beside GE, Exxon and Microsoft. But not yet.
He is welcome to his opinion. Lets look at some previous opinions, August 2004 Wall Street Week transcript:
KIRKPATRICK: For anything.
COLVIN: For anything. And, you know, we can remember when AltaVista was everybody’s favorite search engine. Google came along, better product, superior, took away the market, but who’s to say the same thing won’t happen to them?
SCHLOSSER: Well, they are creative guys, though. I mean I have a lot of faith that they’ll come up with some new ideas down the road that we’ll be able to watch for years to come.
COLVIN: What do you think, David? Is this valuation justified?
KIRKPATRICK: Well, I would never say that. I think any kind of valuation at this sort of level is very, very hopeful about future opportunity.
It is true Google is priced to perform well today (and if they fail to do so the price will go down). And I don’t think it is as good a buy today as it was at $185 (I foolishly didn’t buy at IPO). I did buy more earlier this year, which I am happy to put away for a decade and see where it is then. It is great if you can buy a good stock cheaply but often you are better paying more for a very well managed company than buying cheap companies (by PE, cash flow or EVA or whatever measure you want to use). When I started the 10 stocks for 10 years portfolio in 2005 I put 12% in Google which has increased 134% (along with 12% in Toyota, which is up 67%, and Dell which is down 15%). Google is actually the 3rd best performer as of today (Amazon, up 136%, moved ahead and PetroChina is up 140%). I don’t think Google investors are betting on impossible growth, but time will tell. And the internet makes it easy to see what people predicted previously so we can all see who was right in 5 or 10 years.
I do think at these prices Google is a riskier investment (with lower likely returns) than is was at lower levels (Amazon too). While this may seem obvious, it really is not as obvious as it may seem. If Google’s prospects had improved more than the price increased then at a higher price I might see it as a safer, or possibly better investment… This is what happened when I first bought Google at maybe $190 – after not buying at the IPO. Basically I do not believe Google’s prospects have not increased as much as the stock price in the last 2 years. Certainly I could understand passing up investing in Google today (if so, I would keep a watch out and consider buying if it falls…) but I am perfectly happy to keep my holdings.
Read this article from Fortune (not by Colvin) in 2004, GOOGLE @ $165 Are these guys for real? some quotes:
Goldman Sach’s Anthony Noto recently assumed that earnings could also rise by a 25% annual rate through at least 2009, which then justified his new “target price” of $215.
Now let’s check such math and figure out just where it implies Google might be ten years out. Assuming 20% annual returns from that $165-a-share level (a reasonable investor expectation given the risks), its market cap would soar from around $45 billion today to $278 billion by 2014. That is a lofty height where only a handful of blue chips stand today–GE, Exxon Mobil, Wal-Mart, Citigroup, Pfizer, and Microsoft, to be precise. Dazzling? Yes. Doable? Only if everything over the next ten years goes right.