Tuesday, October 23, 2007

Google, Absurdum

I figured that we ought to touch on some real “bat guano” here for a bit. Google has gone hyperbolic and it is reminiscent of another stock back in the last big melt down.

RCA started off in the stock market in 1921 at $1.50 a share and in 1929 rose up to $549 (if you don’t figure in the 4 for 1 split in 1929). Remember that back then Joe Six-NO-pack (prohibition) paid about $15 per month rent. 549 bucks was a hell of a lot of money. RCA did not pay a dividend (you don’t need one with that sort of performance).

Fast forward to today and we look at Google the "Wunderkind" of the stocks market. If we carry the comparison back to 1929, a Model T ford was $400 so you are looking for a Beamer or better in today's market. That would be a stock price of about $28,000 a share. I guess we are not there yet. The peculiar thing about the Google graph is that the scale is extremely misleading. If you reversed the horizontal and vertical perspectives, it would look like the first graph. (Graph courtesy of MoneyCentral.MSN.com)

The RCA visual aid also includes another bubble stock called AOL. They bought out Time Warner in 2000. What happened next to Time Warner could be best described as having to do with two well known products Astroglide and Preparation H. That affair pretty much ended after the star crossed lovers meld hit $15 on the stock exchange. Time Warner reassumed its "maiden name" and has AOL stuffed in a closet somewhere.

History describes how Sir Isaac Newton made a bundle on The South Sea Company in the 1620's only to reinvest back and lose it all. Even a year ago Google looked dicey. Here is a link to Googleiots an article from this blog a year ago (nothing much has changed).

When you add up what the company does and how easily it could be replaced for 1/20th of its market cap, its price is absurd. Nobody laughed when AOL bought Time Warner (and nobody has laughed about it since then either).

Maybe Cramer has a prediction for Google to hit $1000. Are we rich yet?


Anonymous said...

Thanks for the Google article. I'm continually amazed at how ridiculously it's priced. Unfortunately, I live in Google Ground Zero--Mt. View, CA.

Anonymous said...

A bit off topic, but....

The wildfires bring up a historical point on housing. In the great earthquake of 1906 in San Francisco, lots of houses were damaged, but the majority of destruction came from the fires, and there is some evidence that some fires were set by owners who had fire insurance, but not earthquake insurance.

Since Southern California is being devastated by the foreclosure fallout, could it be possible that some people didn't try all that hard to put out the flames when embers got near their million dollar homes that were tragically overpriced? If a persons home were headed to foreclosure and themselves for bankruptcy, it seems they would have a lot to gain by letting it get destroyed.

rickjohn said...

Fire insurance only pays to rebuild your house and expenses for living in the mean time. Your mortgage doesn't stop. There is no mortgage advantage to having your house and belongings burn.

The only advantage is rebuilding a new home to your personal specs this year instead of whatever was built years ago.

Anonymous said...

Anonymous said...
A bit off topic, but....

If a persons home were headed to foreclosure and themselves for bankruptcy, it seems they would have a lot to gain by letting it get destroyed.

Having your house burn down does not extinguish ones mortgage debt. Insurance is at replacement value. The losers are insurance companies and the winners would be subcontractors and builders.

Here are some fire conspiracies:
arsonists could be:

Islamo terrorists,
out of work builders, subcontractors, -construction workers/ illegal aliens
Al Gore - blame global warming

take your pick.

Anonymous said...

It is different this time.

I have heard one of the largest revenue channels for Google is the mortgage industry. A hiccup in this online ad spending could be disasterous to this high PE stock.

Of course financial engineering could hide this for some time.

Jim in San Marcos said...

To the Off Topic contributers

The insurance will replace the structure. Out here, that's only 1/3 to 1/4 of the home's value.

Another thing to look at, a lot of people will find themselves under insured. If you lose your house under those conditions, you might be hurting.

As for arson, anything is possible. The wind was blowing so hard that the smokers had to go inside to light up. One tree branch hitting an electrical line and boom, you have fire. It was the wind gusts of 50 to 80 mph that made this so intense.

It looks like 3 people at my wife's school lost houses. My heart goes out to them.

Jim in San Marcos said...

To the Anons on topic,

I guess we all wish that we had bought a 100 shares of Google when it first came out. And how can you sell it as long as it is going up?

Google is profitable, but people don't realize that the stock was sold to the public and they own the shares. The owners are not getting any dividend to support the price. The actual company couldn't give a hoot about the share price. They sold the stock and got their money and you can't touch them. When you buy a share of Google, you buy it from someone else not Google.

If they paid a dividend like IBM, then the transfer agent (the guy who keeps track of who owns the stock) would cut a check to owners of record at dividend time.

If Google went to $8 per share, it would not affect Google as a business.

To Anon 6:52 Don't link the stock price to performance, there is no relationship at this stratospheric price. What the stock does and what the company does are two different things. My argument is that competition will level the playing field.

In the long run if you bought Google, you paid too much.

Anonymous said...


It amazes me sometimes in how you simplify things to make them fit into your biased opinion.
For example, the playing field for Google can only be leveled once their patents expire or else, why haven't Microsoft, yahoo, and others eaten Google's lunch already. You should maybe educate yourself about their search algorithm or maybe read their patents on the US PTO web page, before claiming to know all about Google being overvalued. Maybe you don't know much about computers and software but if that is the case, then don't claim to also claim to know that google is overvalued.
Second, you talk about dividends, do you realize how much cash Google has on its balance sheet, about 10 billion, you think they lied about their bank statement. They could pay dividends but since they have much better use for that cash, they have decided to grow the business.
Third, a lot of people said the same thing about msft years ago, only to watch it climb 1000's of percent or dell which raked in 94,000% in 7 years. So my point is, that maybe your old world economic theories that so far haven't paned out, need some fine tunning for todays economic models.

In conclusion, I like reading your blog b/c it does offer a different perspective, however, when you claim to know everything about everything, it shows your lack of knowledge. It could also be that you are mad about the FED ruining your short position every month but don't take it out on Google just b/c you continue to lose money on your overly pessimistic views. A little balance would really help, as you claim that this blog is supposed to be about, the balanced perspective.
So be fair, if Google continues to rise and make people money, make sure to come back to this post and admit to everyone that you were wrong and that it cost people a lot of money. And if you are right, then also come back to this post and claim your victory. But no matter, stop being so biased and try being a little less bitter and be more fair. The bitterness in you shows through your every single pessimistic post.

good luck and thank you for taking the time to write this blog,


Jim in San Marcos said...

Hi Anon 10:45

I am not attacking Google as a company. If the stock dropped to $8 per share it would not affect the company one bit, the share holders would be a different story. Remember Lucent at $220? it went to $2.

As long as the stock goes up it is worth owning. Can you imaging a stock staying at $700 dollars for 20 years with no dividend? You would want a better return.

As for knowing everything about everything, I try to research what I write. Most of these short essays take me 3 to five hours to compose. I'm not afraid to make a mistake. If you want a glaring one that I would like to forget read the May 6th 2007 "Where have all the VA foreclosures gone"

I can't figure out the bitterness part comes in, most of the time spent writing this blog is done trying to make it funny to read

As for my pessimistic view, what is about to happen is the opportunity of a life time. Plus the definition of a pessimist is an optimist with experience (tongue in cheek)

Thank you for reading, and I hope that nothing I write about has a bitter tone, it's not meant to be such. I enjoy writing this blog, and I would describe my tone as satirical humor loaded with lots of puns and ridiculous examples.

Anonymous said...

GOOG 52 week high.
I know, you think it is overvalued and it will come back down, just like all those people thought about Microsoft as it climbed 100,000%, look at msft now, it is worthless, right! Not.

Jim in San Marcos said...

Anon 1:48

Stocks like IBM, Xerox, Microsoft, Radio Shack, Weren't built out of thin air.

Google can't make the grade. They spend 100k a day on food for employees and vendors. Figure that out.

Anonymous said...

Goog, another 52 week high.
try to figure that out, you can't, that's why you are not making money in the stock.

as for the 100k in food, you have to stop and think that the economy or the job place is not the same as it was when you were probably in the work force more than 200 years ago.
giving employees fringe benefits helps productivity. instead of having workers screw around on the internet for hours everyday at work, they are promoting a different system, a system that lets them bike ride in the middle of the day or eat a salmon lunch.
Again, your outdated business sense does not allow you to see the real value of google's way..
but this is normal, if our economy relied on old farts to come up with new ideas then innovation would be dead.
try to learn from others that are successful instead of just beating them down every chance you get. the google cultures is the new way and it is here to stay, no matter what you think, it is what the market thinks that matters and the market is rewarding Google's way.
the end.

Jim in San Marcos said...

Hi Anon 3:21

Maybe we are not arguing, but rather differing on fine points.

Google is an excellent company and has a very progressive product.

If Google stock went to 100K a share, it would do nothing for the companies bottom line. They already received their money on the IPO and they even pushed the matter with a second PO at $285. That second one is where a lot of the cash on hand came from. It was a very smart move (they didn't earn it).

My point is that the price of the stock has no real relationship to future earnings of the company.

This stock has the capability to hit $2,000 a share on just speculation in the next three months. The price being paid in no way implies future earnings. It's a stock bubble.

Now if the bubble collapses, it does absolutely nothing to Google, they haven't lost a dime. The company will not even feel it.

Anon choose a name when you post. Click on "other" instead of "anonymous" when you post and type in a name that suits you. That way we can flame each other on a more personal level:>)