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Speaking of Google IPO

The earlier post about Google becoming a "penny stock" is stupid and just plain wrong.

But,  I do believe that Google's IPO will be a disaster that will make a few insiders rich and everyone else is going to get screwed.

Seriously, there are lots of companies out there who are just as profitable as Google, or more so, and their stock price is nowhere near $100.  With a starting price of $100+ Google has nowhere to go but down.

If Google really believes in their "do no evil" policy they would price the stock more reasonably.

Gern Blaansten
Saturday, August 14, 2004

If they price it that high, and you invest, and you lose money because it drops, how is that Google's fault?

Justin Johnson
Saturday, August 14, 2004

BTW, what is Google's current gross, and what dividends can investors expect to earn?

Fred
Saturday, August 14, 2004


Screwed?

Hey, if anyone is silly enough to jump in and buy Google at any price just because it's Google then they will get what's coming to them.  Nothing malicious about it. Lots of stupidity and greed, but nothing malicious.

Mark Hoffman
Saturday, August 14, 2004


The $100 price means nothing in particular.  You need to consider the number of shares issued as well.  MSFT is trading at $27 a share which values the company at 290 billion.  Google's $100 share price will not be valuing Google at 3x Microsoft.  $100 / shares values google around 25 Billion.  Yahoo is valued around 37 billion.

The prospectus says the google does not pay a dividend. Google retains all earnings and expects to continue to do so in the future.

2003 revenue was 1.4 billion. 2004 1st half revenue was 1.3 billion.  2003 profit was 106 million. 2004 1st half was $143 million.  Yahoo made profits of 237 million on 1.6 billion in 2003.

https://www.ipo.google.com/prospectus 

https://www.ipo.google.com/prospectus

Zane
Saturday, August 14, 2004

"The prospectus says the google does not pay a dividend. Google retains all earnings and expects to continue to do so in the future."

Yeah, we used to say that, too.

Philo [Microsoft]

Philo
Saturday, August 14, 2004

>> The prospectus says the google does not pay a dividend. Google retains all earnings and expects to continue to do so in the future.

OK, so how is the price of a share decided, if investors don't expect those shares to earn them any dividend? How did they end up with a $108 to $135 price range to begin with?

Fred
Saturday, August 14, 2004


Great question Fred.

The pricing seems to be designed to value google very similarly to yahoo.  Why 25 million shares at $100 instead of 250 million at $10 ?  No idea.

Zane
Saturday, August 14, 2004

Fred,

Even when the company doesn't pay dividends, the stock is typically valued based on the earnings.  The understanding being that the company will 'eventually' start paying dividends.  Case in point, MSFT.


Cheers
Koz

Koz
Saturday, August 14, 2004

"The understanding being that the company will 'eventually' start paying dividends."

Not necessarily. The stock market is built upon a somewhat accepted, albeit vague and arbitrary, valuation of what a company is worth - you buy a piece of the company, a share, hoping that the company itself will appreciate in value thus leaving you with something worth more. The plan doesn't require them to explicitly pay you at any point. The problem with the market is that "what a company is worth" is an undefined formula, and it varies over time -- during the .COM hayday the valuation of a technology company was based upon absolute fantasy.

Think of this like buying a brick of gold if you're a speculator and you believe that the value of gold will increase - you don't expect that the brick will wash the toilets or pay you rent, but you do expect that the world market will place more value on your brick, allowing you to sell at a profit. Yet what sets the price on a brick of gold in the first place?

Dennis Forbes
Saturday, August 14, 2004

This is why I stick with I-bonds.

Kyralessa
Saturday, August 14, 2004

The standard is to consider the value of the company as a multiple of the annual profits.

You used to be talking a figure of around ten to twelve times annual profits. When you get to over twenty times then speculative mode has hit. Google appears to be valuing itself at around 130 times its annual profits.

Stephen Jones
Sunday, August 15, 2004

Stephen is correct but that sort of valuation assumes the same earnings into perpetuity. Technology companies typically command higher price/earnings ratios due to their expected growth rates.

For example, a stable company which earns $10B profit each year consistently might be valued at $150B during a "normal" investing era. Making several assumptions about dividends and/or stock price appreciation, an investor would take 15 years to get the value of his share back.

However, a company which earned $10B this year, $5B the year before and $2.5B the year before that would be valued at significantly more than $150B, because the estimated earnings over the coming years would be significantly more than they would be for a company with no earnings growth. Earnings projections are generally unreliable however, particularly for technology companies, and there is no way in my opinion that the Google valuation is justified, despite their record of earnings growth. It is priced assuming a perfect future for the company, where everything goes to plan for them and for the industry and economy in general.

Aussie Bloke
Sunday, August 15, 2004

Back before the days of "day traders" every stock paid a dividend, and it was largely the dividend that determined the value. In the past decade or so the trend is more towards not paying dividends and reinvesting the money (or just plain holding on to it like MSFT). After the tech bubble, companies are moving back towards paying dividends to lure investors back.

With a company like Google - tech companies, biotech companies, etc. it really is pure speculation, just like with the bubble what you're paying for is the *promise* of the technology.

Despite all of it's innovations, it's possible Google is at the apex of their lifecycle, or maybe they've got lots of growth potential and can take over markets we never expected them to (like email). Whether or not you invest is based on what you believe about the company's future, and more importantly, about people's perception of the company in the future.

Stephen's analysis of P/E ratios sounds about right. If you think about stock as ownership in a company, you might want to create the analogy of actually buying a company. If you were a Warren Buffet type and bought whole companies, you'd probably pay 10-12 times earnings for the company. You'd really have to believe in the company's growth potential to buy it for 130 times earnings (how many years would it take to break even?). Or maybe you can sell it down the road to someone else for twice what you paid for it.

www.MarkTAW.com
Sunday, August 15, 2004

Just don't buy it if you think it's not worth $100. To my knowledge, no one is being forced to purchase at that or any price. I don't see what the issue is.

halpgr
Sunday, August 15, 2004

"To my knowledge, no one is being forced to purchase at that or any price. I don't see what the issue is."

1. It's just comments and observations. We are allowed to make those, right?

2. When, err if, the share goes in the crapper, every uninformed fanboy investor will be bitching and complaining about being ripped off, and attempting to sue their broker/the banks/Google.

Dennis Forbes
Sunday, August 15, 2004

And we get to go "Nya nya, told you so!"

www.MarkTAW.com
Monday, August 16, 2004

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