As I mentioned in my recent Globe and Mail column on the Facebook IPO rumours, I don’t think there has been so much frenzy around a tech startup and its valuation since the Google days, although the debate over YouTube’s value (thanks in large part to the always game Mark Cuban) runs a close second. We now have valuations that run anywhere from a mind-boggling $10-billion — and this is for a company with annual revenue of about $100-million, at last estimate — all the way to zero. The big debate lately has been whether Facebook’s poor performance on the advertising front makes it worth less (or worthless), or whether it just means that advertising isn’t the route to profit for a social network, as my friend Scott Karp of Publishing 2.0 describes here. I, for one, hope that Facebook does do an IPO so that we can let the market decide what the company is worth. Sergey Brin says he’d be happy to talk to Facebook but isn’t planning to buy it, and thinks it is building a great company on its own.
Those Google guys — they’re a nice bunch, and smart as all get out, but when it comes to dealing with investors they could probably use a few tips. For example, when your stock is selling for more than 80 times earnings, and you have a market value of over $110-billion (U.S.), don’t use the words “growth is slowing.” Ever. Why? Because then your share price will get creamed, as Google’s did on Tuesday, when chief financial officer George Reyes did exactly that at a Merrill Lynch conference on Internet advertising (which accounts for about 90 per cent of Google’s revenue).
Specifically, the Google executive was quoted by CNBC as saying: “Growth is slowing and now largely organic… the search monetization gains have now been largely realized.” Did he say that the company was going down the tubes? No. But when you’re growing as quickly as Google has been — and your stock is predicated on that growth continuing — admitting that growth is slowing down even a little is tantamount to yelling “Sell!” Which is what investors did: Google was down by more than $50 or about 13 per cent in early trading, which wiped about $14.5-billion off the company’s market capitalization in a matter of hours (former analyst and tech-stock lightning rod Henry Blodget has more here and also here).
By mid-afternoon, the stock had rebounded to trade at $373, which meant it was only down by about 4.5 per cent from Monday’s close — but clearly some investors were rattled. It’s been a tough couple of months for the search kingpin: although Google’s stock price has come back from its lows of a couple of weeks ago, it is still down by more than 20 per cent from its peak of $475 earlier this year. And Mr. Reyes’ comments didn’t help the rest of the Internet sector either — shares of Amazon, Yahoo and eBay were all down as well on Tuesday.
While the Google exec’s comments may not have been news (at least not to anyone who looked at the company’s financial results from the most recent quarter) they seem to have come as a surprise to some investors. And they could make them increasingly nervous about the stock going forward. As my friend Paul Kedrosky notes, it’s not so much that Google doesn’t give guidance, it’s that they suck at it.
It’s nice to see a couple of brave voices suggesting that Google, which has climbed by almost 400 per cent since it went public less than 18 months ago, might be a little overvalued — or at least “fully valued,” as analysts like to say when they’re trying to be cautious. Are they right? That remains to be seen. But it’s difficult to feel comfortable with a stock (particularly one with such a short track record) when almost every analyst that covers it has a “buy” or “hold” rating.
Small companies can grow as quickly as Google has and not hit any speed bumps or potholes, but a company that goes almost straight up from a market value of about $22-billion to one of almost $130-billion is doing the equivalent of driving an ocean freighter at the speed of sound. Bumps are inevitable. When analysts are uniformly bullish, many investors take it as a contrary indicator — and they are probably right to do so. Such an atmosphere suggests that whatever weaknesses or risks there might be (and they almost always exist) are being either ignored or glossed over.
Could Google be the Web equivalent of Wal-Mart, which went from being a small, regional retailer to the biggest company on the entire planet? Sure it could. But it’s unlikely to get there in two years when it took Wal-Mart two decades. The Internet is fast, but it’s not quite that fast. And that’s why it might be handy to know about some of the potential speed bumps in advance.
Please read the rest of this column in progress at globeandmail.com