Comments on: How much is Google worth?

By: Bill Mann

Bill Mann — Fri, 30 Apr 2004 15:10:10 +0000

File me under Google-skeptic as well. I don’t think people have even delved into the Dual Class structure of the company yet. Unfortunately your analysis is a little off. For return on equity you don’t use the stock market value, you use shareholder equity, an account on the balance sheet. SE is the combination of retained earnings, par stock, foreign currency translations, etc. In the filing they list shareholder equity of $727 million, giving it an annualize ROE exceeding 33%. This amount will drop dramatically by virtue of all the unneeded cash the company is going to generate from the IPO.

By: Harry Clarke

Harry Clarke — Fri, 30 Apr 2004 01:26:08 +0000

Smoof, I don’t think the article you cite makes the discussion moot at all. It says Google seeks to raise $2.7 billion not that this is the value Google is assigning itself. The last three paras make the point clear—the number of shares to be sold is not set so you cannot guess what the market value will be. The article suggests figures between $16-$24 billion. The puzzle remains.

By: Smoof

Smoof — Thu, 29 Apr 2004 23:16:05 +0000

Unfortunately, Google has gone and made this whole discussion moot: Google sets $2.7 billion IPO

By: Harry Clarke

Harry Clarke — Thu, 29 Apr 2004 14:28:46 +0000

Ian’s point is fine if Google can hang onto an exclusive access to this info. But entry seems more than possible—it seems likely. Seth’s explanation doesn’t seem right on the same grounds. If investors anticipate entry they will downgrade the stock. It is not true that the only group who fear entry are insiders? I think to the contrary everyone assumes some type of entry will occur. Its not just what Goggle can do but what Goggle can do that others (in the long-run) can’t.

By: Seth Finkelstein

Seth Finkelstein — Thu, 29 Apr 2004 14:14:48 +0000

Google insiders reportedly are quite concerned with the lessons of Netscape, one of which is Beware Microsoft. Part of the reason for the IPO now may be that Google is arguably at peak value before Microsoft can mount an attack.

By: Doug

Doug — Thu, 29 Apr 2004 08:59:14 +0000

I like Ian’s thinking on this, and the idea about distribute computing is also very interesting. Both going to show that John’s valuation is more a starting point than a finishing point. And if Ian can make a living promoting stocks, then the ‘Wall St hardnoses’ are not as hardnosed as Harry seems to imply. Surely there will be a stampede for Google. The questions for me are how far it will overshoot, how management will react to a market cap that’s probably way above a sustainable level, and when the price will settle down. Answers to those (and some starting capital) would be a good way to make some nice cash.

By: Harry Clarke

Harry Clarke — Wed, 28 Apr 2004 13:20:12 +0000

This is a nice puzzle. Goggle is probably worth more than $25 billion to society—we use it all the time. But the privately appropriable value is perhaps $2.5 billion not $25 billion. Goggle is drenched in public good value but short on private value. So why do the Wall Street hardnoses value it so high? You can say investors are stupid or, as Doug says, value is independent of present value calculations but this seems to me a cop out. You can explain any apparent weird valuation this way. There is no stock market boom so a ‘greater fools’ theory doesn’t work. What’s going on? Why should the market overvalue it on the basis of any plausible present value calculation? Are the Wall Street hardnoses wrongly internalising social values that sound economic theory says they should ignore and if so why? Good questions (I think) but, sorry, no answers.

By: Ian Whitchurch

Ian Whitchurch — Tue, 27 Apr 2004 23:44:19 +0000

OK, disclaimer : I work in the stock market, as a promoter, but I deal with oil stocks, not techs. What is missed is that Google have the Holy Grail of advertising – knowing exactly what mindshare a product has, as compared to what it had last week. Lord Lever once said ‘Half the money I spend on advertising is wasted. My only problem is which half ?’ Google can answer that question for you. Say you are Sony, and you want to know which of your stable of pop stars are gaining and losing popularity in which market. Google, by keeping track of how many users are asking about them and where, can tell you But it will cost. Google knows how the world thinks. And thats worth – literally – billions and billions. Ian Whitchurch

By: Keith

Keith — Tue, 27 Apr 2004 21:37:03 +0000

Iv’e heard rumors that Google is working on an OS, which would efectively turn the Internet into a single giant super computer with gigaquads of memmory and thousands of chained processors, that anyone could access, search and use for free. How that would effect their ecomic outlook, ic an’t say, not having much of a head for numbers but i’d guess it’d be pretty valuable.

By: richard bauge

richard bauge — Tue, 27 Apr 2004 20:14:05 +0000

You laugh now, but people like you also laughed when they said the Segway would change the world. Now look who’s laughing. Okay, bad example.

By: Quaker

Quaker — Tue, 27 Apr 2004 19:38:02 +0000

Sure, you scoff now. You’ll be laughing out of the other side of your face when they introduce their perpetual motion engine.

By: Russell L. Carter

Russell L. Carter — Tue, 27 Apr 2004 19:35:02 +0000

“think you also need to look at what else they own, which includes http://blogger.com. And at projects listed at http://labs.google.com.” Yeah, blogs are a perfect match too, as I realized after I posted the first comment. All these are excellent ways of aggregating eyeballs, but I don’t see much of a unique business beyond selling ads. And there is no area on the lab page in which IBM or Microsoft or even Sun has not already achieved world class competency. Microsoft has already bought every world class expert that can be bought; it’s nice that Google has developed a great stable, but they’ll never be able to compete against Microsoft’s cash cow.

By: Hack

Hack — Tue, 27 Apr 2004 19:10:47 +0000

“My question is why would anyone sell shares in such a rapidly growing apparently self financing company? ” VCs, eager to claim some good returns after a three year slump. Also they are hoping a succesful google IPO will create a rising tide lifting their other boats.

By: Jack

Jack — Tue, 27 Apr 2004 17:57:56 +0000

The return on equity that you calculate would more usually be called the earnings yield. The equity referred to in most ROE calculations is the balance sheet equity which is likely to be much smaller than the market capitalisation in this case. Not that this undermines the main point but someone will be doing some cash flow/return on equity calculations to perform the valuation and extrapolating growth out to five years and working Moore’s law into the cost base. Add to that massive operational gearing assumptions (marginal margins being apparently quite spectacular). I imagine if it is suggested that the company is worth $25bn and investors can get in for $10bn they’re sure to be enthusiastic. My question is why would anyone sell shares in such a rapidly growing apparently self financing company? On the one hand the sellers don’t need to sell unless the price is very good. On the other maybe it isn’t as good as it looks. There were rumours of an impending float last summer. Will they time things as well as AOL?

By: Mark Byron

Mark Byron — Tue, 27 Apr 2004 17:35:32 +0000

That would give it a 160 P/E when the average stock is around 25. Income would have to increase six fold before it finishes maturing; I don’t see that happening. Google’s good, but not that good.