Yes, says Fortune's Geoff Colvin. Sure, there have been people claiming Google has hit the ceiling during almost every phase of Google's unprecedented value creation ascent, but Colvin swears that Google is bound for a tumble. The reason - Google can't keep investing capital at 13% and getting 53% returns, a spread better than 99% of the Russell 3000. Google has only invested about $9 billion of capital so far but is experiencing diminishing returns, from 111% four years ago, to 82% the year after, to 53% in the last four quarters.
Colvin looks at Google's implied future economic value added (EVA, or the dollar amount by which return on capital exceeds the cost of capital) in relation to its current share price. His argument:
To live up to the expectations embedded in its current share price, Google would have to increase its EVA, which was $2.4 billion for the past four quarters, by $2 billion annually this year, next year, and every year into the future - forever. So Google's EVA next year would have to be $4.4 billion; in five years it would have to be $12.4 billion, and so on.That's what investors are counting on when they buy Google at today's price. Are they being realistic? No, they're not. To hit that EVA target, Google would have to invest $5.1 billion every year at its recent knockout return of 52.5 percent (assuming its capital cost doesn't vary much). But you can't invest $5.1 billion every year at 52.5 percent.
Google (Nasdaq: GOOG) is down almost a half a percent in daily trading.
Don't go gaga over Google [Fortune via CNN Money]
Posted by Random Banker , Jul 25, 2007 12:18PM
Contrarian investing and the inverse correlation between business journalists predictions and... reality indicate it may in fact be time to buy google.
Posted by Jonas Cord , Jul 25, 2007 12:21PM
Between no voting rights and no dividends, what precisely would I be buying if I bought Google stock? Is it a private fiat currency or something?
Posted by Russian Red Sack , Jul 25, 2007 12:25PM
RB, Google has 24 buys, 3 holds and 0 sells; contrarian how?
Posted by duh , Jul 25, 2007 12:48PM
he said business journalists russian retard, not equity analysts
Posted by anonymous , Jul 25, 2007 1:04PM
1 business journalist vs. 27 analysts...like he said, contrarian how?
Posted by Russian Red Sack , Jul 25, 2007 1:08PM
Actually he said contrarian investing AND inverse correlation to business journalists, so yes, maybe he is contrary to one business journalist, but is RB contrarian, as in, is going long GOOG a contrarian idea, I daresay not.
Posted by joe , Jul 25, 2007 2:19PM
fun fact: GOOG has a larger market cap than BRK despite BRK earning more in net income last year than GOOG generated in sales.
Posted by Random Banker , Jul 25, 2007 3:00PM
It was really more of a joke. However, I do believe in contrarian investing based on the stories printed in the business publications. I simply would not buy GOOG because at 140 bn market cap I simply don't think they have all that much upside even if they do become the next microsoft. There are simply much better uses of my capital.
On a brief aside, a well respected finance professor I know shorted google at the IPO price of $80 based on his contrarian beleifs that google was mostly hype. In other words, I wouldn't buy it but I sure as hell wouldn't short it.