Much of the analysis of Google's IPO valuation looks at current revenues and earnings, growth rates, comparison with competitors, and arrives at a "rational" valuation of $10B to $25B on the high end.
From the New York Times, here's how to make the case for a much bigger number. Why Google Is Peering Out, at Microsoft says that Google may have "global domination" ambitions to unseat Microsoft as the pervasive and omnipresent computing platform. This is way bigger than search, advertising, or email: "While Microsoft may want to be the next Google, the Web search company has its own still-secret plans to become the next Microsoft."
Until now, most of our operating systems have been extensions of the desktop metaphor," said John Seeley Brown, former director of Xerox's Palo Alto Research Center. That metaphor makes less and less sense, he said, adding, "An information system that spreads over the whole globe is the way to go.
While much of the world has been pursuing a computer vision that is increasingly decentralized, Google is taking the opposite course - using the Internet to make its computer system, the world's largest, available everywhere.
Microsoft's Windows could literally be reduced to being a window into a more interesting computing world which would take place elsewhere.
Microsoft's current market valuation is about $280B.
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| Google's prospects from a Google user and independent investor |
The argument for a $60B market cap - 5/08/2004 12:42:33 PM
Putting a value on Google - 5/08/2004 02:32:31 AM
James Cramer, founder of thestreet.com, writes an insightful article for New York Magazine on how to put a value on Google shares. The article was written 10 days before Google's IPO papers were filed, so he's guesstimating some of Google's finances.
But it's worth a read for the comparison with Yahoo to see how much you would consider paying for a share of the stock offering. Cramer estimates Google to be worth $18 billion at the high end. But he didn't anticipate that Google would do a Dutch auction, so he forecasts lots of froth on the opening day: It would not surprise me to see the company’s capitalization at a staggering $60 billion—almost twice Yahoo’s worth—despite Google’s relatively unproven business model. In other words, the deal’s a buy if you can get some on the offering and a sell where it opens! If Cramer's comparisons with Yahoo are sound, then when preparing auction bids it's probably wise to bid shares at a price that would yield an ~$18 billion or less. (You can't tell what that is per share until Google gives some indication of the number of shares they will float.) But if auction bids are valuing the company significantly north of this (say, $60 billion), Cramer advises to sitting this one out: Because the yahoos—pun intended—who buy the stock will have severely overpaid ... Google, the company, may be the real deal, but Google the stock may just show us a return to the bubble days that we all thought had mercifully been put behind us. Or, to put it another way, Google, now synonymous with “to search,” could, the moment it opens for trading, become synonymous with “to fleece.” In an article on April 30, after the Google IPO announcement, Cramer praised the company for trying to avoid Wall Street corruption, but still thinks the net-savvy but valuation-naive public could bid up the value of the company to outrageous numbers ($60 billion plus). In a story on thestreet.com, is looks like AOL/Time Warner recently exercised a warrant to buy 7.4 million shares at $3 per share--this could give Time Warner a $500 million windfall when Google's shares are floated. Google's arch-rival Yahoo also owns a stake in Google that could pay handsomely. The article also quotes estimates of 45 million shares being issued in addition to the 246 million already outstanding. If Google is valued at $20 billion, that would be about $69 per share. |
Google IPO plan befuddles analysts - 5/08/2004 02:00:00 AM
Google's "Don't Be Evil" philosophy is making the experts' heads spin.
From the L.A. Daily News: [Analysts] say the philosophy espoused by Google's principals smacks of naivete, inflates already stratospheric expectations and could lead to investor disappointment. ... When you start saying things like this, I think you set yourself up for a fall," said Tom Taulli, an author and lecturer at the University of Southern California's Marshall School of Business...I don't know if there's the killer instinct at Google,' he said. 'There's this egalitarian, humanitarian (philosophy). ... They're going up against some very ruthless competitors. ... "I'd like to think Google can hold true to their guns, and maybe they can help Wall Street understand the importance of long-term strategies," Davis said. "But I know what going public would do to us. ... The quarterly pressures tend to stifle innovation for the long haul." (Jim Davis, SAS Inc.) (SAS is the "most important software company you've never heard of." You might say SAS has a "Don't Be Evil" way of thinking, but they won't go public for fear of losing their culture referred to as "Sanity as Strategy.") |
Charlie Munger in Rare Form - 5/08/2004 01:22:27 AM
The Google IPO documents borrow heavily from Warren Buffett and Charlie Munger, of Berkshire Hathaway. The language is plain English, and they show common sense and humor.
The Motley Fool provides excerpts from Charlie Munger's Q&A session with stockholders. Munger is Warren Buffett's right-hand man at Berkshire Hathaway, and also chariman of Wesco Financial. This is a great read for Google IPO investors because Munger stresses that high ethical standards yield high investment returns. This is the essence of Google's "Don't Be Evil" philosophy. Here are a few snips: We believe there should be a huge area between everything you should do and everything you can do without getting into legal trouble. I don't think you should come anywhere near that line. We don't deserve much credit for this. It helps us make more money. I'd like to believe that we'd behave well even if it didn't work. But more often, we've made extra money from doing the right thing. We don't believe that markets are totally efficient and we don't believe that widespread diversification will yield a good result. We believe almost all good investments will involve relatively low diversification. Partly [investment success is] temperament -- most people are too fretful, they worry to much. Success means being very patient, but aggressive when it's time. And the more hard lessons you can learn vicariously rather than through your own hard experience, the better. What happened with Martha Stewart was that she heard some news, panicked, and sold the stock. It turns out that if she's just told the truth [about what she did], she'd have been OK....Were I her lawyer, I would have said, "You know, Martha, that's an interesting story and I'm your lawyer, so I'm required to believe you, but nobody else will. So, you're going to have to come up with a different story or you'll have to tell it through a different lawyer because I don't like losing cases." Investing Overconfidence: Most people who try it don’t do well at it. But the trouble is that if even 90% are no good, everyone looks around and says, “I’m the 10%.” For more wit and wisdom from Charlie Munger and Warren Buffet, check out these books: Damn Right! Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger Buffett : The Making of an American Capitalist The Essays of Warren Buffett : Lessons for Corporate America |
Google's Big-Bucks Expansion Plans - 5/08/2004 12:44:47 AM
Business Week speculates about Google's capital spending plans. The company says they'll spend $250M in 2004 on long-lived capital assets--that's about 25% of revenues, an incredibly high number. Since this number appears to be much larger than required to maintain search and gmail, could Google have some surprises in store?
Those in the know say Google has plenty of other distributed-computing offerings under consideration. They could range from Microsoft Office-like word processing or spreadsheets to distributed media libraries for music and video lovers. Regardless, any service that needs to handle tens of millions of users will need loads of new computing power. |
Google's IPO in The Economist - 5/07/2004 11:57:12 PM
The Economist writes (sub req'd) that Google's stock is likely to be priced to perfection, at around 100 times earnings, or $25B. As noted earlier, Warren Buffet applauds the long-term perspective, but will not be a buyer: "It's a fabulous business but my guess is it comes at a fabulous price.”
A second article in the Economist covers the unusual auction that Google will use to determine a price and select winning IPO investors. Google hopes to make the IPO "fairer and more transparent than the norm." Also, "an auction could reduce the “pop”—a sharp rise in price once trading starts." But historically, auctions have had problems. "European countries auctioned licences for 3G mobile telephony," but the buyers paid so much they were buried in debt--while selling governments made huge windfalls. The article reviews a new book, Auctions: Theory and Practice, by Paul Klemperer, which explains how auctions can fail to achieve the right price--either way too high or way too low. Given the large number of expected bidders and the relatively low costs, Google's IPO runs a bigger risk of setting a price that is unsustainably high. That would be the result of what economists call the “winner's curse”: high bidding by naive punters that allows them to win an auction, but only by overpaying. Klemperer suggests that Google could avoid this problem by "auctioning a small fraction, say 10%, of the shares to institutions" first, so ordinary investors could see what the "smart money" considers to be a fair price before they bid. |
Will you buy shares in Google? BBC debate. - 5/07/2004 10:11:27 PM
BBC news has a sampling of investor opinion on the Google IPO.
Forty-six responses from ordinary investors reportedly "reflect the balance of opinion received so far" in an online debate. By my count, opinion is running about 2-to-1 against the Google share float (from a largely international audience). Here is a small sample of sentiment: Negative comments: Google already dominates the search engine industry, so how will it expand? The on line share auction is likely to lead to a gross inflated offer price. Google censors negative stories about the war in Iraq from readers in America. Like most companies that float, Google's service will get worse when the share holders complain about lagging profits...RIP Google. Positive comments: It would be good to own a little part of Big Brother. Any chance to get in on a high profile IPO is worth it. The world's most visited website? The world's most advanced website? Wealth of advertisers? Yes, I think I'd like some of that. I will buy Google shares, because they are the most useful service on the Internet. |
Brin & Page: What to do with all the money? - 5/07/2004 06:36:45 AM
Google's Sergey Brin and Larry Page could be worth $4 billion each after the company's stock offering. The New York Post explores what they should do with all that wealth--and accidentally gives some good advise to ordinary investors looking to buy into the IPO.
Overnight, the two Google founders will be richer than "Apple founder Steve Jobs"... 'Star Wars' creator George Lucas... Donald Trump ... or Jerry Yang, founder of Google archrival Yahoo!" They could, of course, buy "yachts, private planes and new homes." But when it comes to investing, they should avoid technology companies: They should be putting a big chunk of their investment portfolio in everything except technology companies whose business cycles are just like Google's," ... blue-chip stocks, overseas stocks and ... hedge funds ... commodities ... small-stock index futures Good advice for Sergey and Larry also works for the ordinary investor lookiing to buy 100 shares: It's the stupidest mistake I've seen people make - investing in something they have dreamed about but they don't understand, like starting a restaurant because you like good food. Don't just buy Google stock because it's hot, or because you like to use Google search--learn about the company, its business model, competition, and technology before you invest. Buying Google stock is a bet on their future, so know enough about the mechanics of their business to have your own opinion of their prospects. (That's the purpose of this site.) Finally, Brin and Page could set up a foundation to support social and enviornmental causes, similar to the Bill and Melinda Gates Foundation. |
Google's "Winner's Curse" - 5/06/2004 04:48:22 PM
Google's prospectus warns of a mysterious "winner's curse:"
The auction process for our initial public offering may result in a phenomenon known as the “winner’s curse.” ... We caution investors that submitting successful bids and receiving allocations may be followed by a significant decline in the value of their investment in our Class A common stock shortly after our offering. What is the winner's curse, anyway? James Miller eloquently explains that: Winning an auction usually means that you thought the item was worth more than anyone else did. This is bad news because other people probably know something about the good that you don't, so the mere fact of your winning should cause you to lower your estimate of the good's value. ... Rational investors will take the winner's curse into account when making a bid. For example, assume that before the auction you think a share of Google is worth $100. But you figure that if you end up being a winner in the auction it means that most investors think Google is worth less than $100. So, the act of winning will cause you to think Google is worth only $80 a share. You should, therefore, bid no higher than $80, an amount diminished by the winner's curse. Miller is the author of Game Theory at Work: How to Use Game Theory to Outthink and Outmaneuver Your Competition. The Winner's Curse, by Richard Thaler, examines this phenomenon from the standpoint of economic theory, and explains why real people don't always behave as economists' models say they should--and why this matters in the real world of investing. Harvard economist Andrei Shleifer argues in Inefficient Markets: An Introduction to Behavioral Finance that market prices can get out of sync with the real world (and stay that way for a long time) due to investor sentiment. Perhaps investor sentiment is every bit as important as economic fundamentals when deciding how much Google is worth, and how many dollars you would pay for a share. |
Google CEO no longer chairman - 5/06/2004 10:29:27 AM
Google's CEO, Eric Schmidt, is no longer CEO of the company. A San Francisco Chronicle story attributes this to improving corporate governance and to "make the board more responsive to shareholders rather than a rubber stamp for management decisions."
"The point of having a separate CEO and chairman on the board is to create a balance of power," said Paul Hodgson, a senior research associate with Corporate Library, a private research firm in Maine focused on corporate governance issues. The article notes that Siebel and Dell have also split the Chairman and CEO positions. Disney's CEO, Michael Eisner, was recently forced to relinquish the Chairman post by a shareholder revolt. This study examines the relationship between good corporate governance and investment return, and finds that the more accountable companies are to stakeholders, the higher the return on investment. |
Google Chooses Notorious Bank for IPO - 5/05/2004 08:41:48 PM
From the Associated Press, this article questions why Google chose Credit Suisse First Boston, "most notorious investment bank of the IPO boom," to lead its IPO:
While Credit Suisse First Boston presumably cleansed its reputation two years ago with a $100 million settlement of federal charges, Monday's conviction of the firm's former star banker was a perfectly timed reminder of the greedy past that shadows one of Google's new Wall Street pals. The article continues to assert that Google's choice to use a Dutch auction instead of the traditional public offering may not be completely unselfish: Despite the naive temptation to view Google's intentions as altruistic, there were plenty of old-fashioned, capitalist motives behind the decision to choose an unorthodox "Dutch auction" to sell $2.7 billion worth of stock. The auction system is designed, in theory at least, to reap a far bigger payday for the company going public by protecting against the abuses that CSFB and other investment banks were accused of perpetrating as stewards of the traditional IPO process. ... It was Google's huge success that gave its founders enough leverage to force Wall Street to collaborate on an unorthodox method of selling stock that may generate only half the banking fees that would come from a traditional IPO. Too bad the company didn't also use that leverage to prove its change-the-world rhetoric by shunning the worst offenders in corrupting the IPO business. CSFB settled with federal charges against it for $100M in 2002. For more on the Google IPO please see www.buygoogle.com. |
gmail IDs available on ebay - 5/05/2004 07:36:01 AM
Update to post from May 3rd:
Today there are 289 invitations for a beta gmail account listed on ebay. The going rate is about $60. 631 have sold in recent days at prices ranging from $35 to $262 for an invitation to set up your own account. The ID hackers@gmail.com was listed for $855, but did not sell. It appears that Google is allowing current beta testers to invite their "friends" to join. And the price of "friendship" can now be determined at auction. |
Google's Big Project - 5/04/2004 06:27:59 PM
Baseline, a project management site, takes a quick look at the backoffice projects that Google is working on.
Their SEC filing lists two signficant projects in the risks section of the document. Tracking and automating AdSense billing, collection and credit evaluation will be outsourced. From Baseline: "If this transition is not successful, our business and operations could be disrupted and our operating results would be harmed," says Google in its regulatory filings. Google isn't kidding—95% of its 2003 revenue is advertising-based. Google also has a major effort underway to improve internal controls, security, and financial processes. Just like most larger companies, Google is apparently scrambling to comply with the requirements of the Sarbanes-Oxley legislation. Section 404 of the act requires management to report the sufficiency of the company's internal controls, and to certify the financial statement with their signatures. |
"Rationing of IPOs encourages coruption" - 5/04/2004 05:08:20 PM
An .op ed piece from the Wall Street Journal in September 2002 made the case that today's IPO system is closed and corrupt, just like closed communists economies. The author, Alan Murray, argues that the solution is to open the IPO process--just like free markets reduce corruption, and open and free public offering should result in fairer prices and less graft:
When the price of a stock jumps to $20 from $10 in the first day of trading, reaping instant profits for the lucky few who have been allocated shares, the investment bankers celebrate a “hot” offering. They ought to have their bonuses rescinded, for doing a poor job of pricing. Apologists say pricing a new issue is more “art” than “science.” That might have been true 20 years ago; today, it is hogwash. As William Hambrecht , CEO of WR Hambrecht & Co. has demonstrated, today’s technology makes it perfectly possible to use auctions to find the market price of a new issue. For the last decade, U.S. government officials have been preaching the virtues of free markets to countries emerging from behind the Iron Curtain. The sermon has gone something like this: When you have controlled prices, you can't prevent corruption. When you allocate credit, people bribe loan officers. When you have import quotas, people bribe customs officials. The best antidote for corruption is free markets, with the market clearing prices. Wall Street needs the same lecture. WR Hambrecht & Co pioneered the "OpenIPO" where prospectuses are delivered online to qualified investors, and the offering is conducted through a Dutch auction. Hambrecht says their approach delivers equal access, fair allocation, more flexibility and equal treatment. Google's plan appears to be a variant of this process. |
Dilbert on Dysfunctional Stock Investing - 5/04/2004 02:33:54 PM
Here's a funny and irreverent look at scandals in the capital markets.
Scott Adams can communicate in 8 frames what it takes a whole network of journalists to get across. |
To Derive Bid, Use Dow + Pi * Your Age - 5/04/2004 10:58:14 AM
The Washington Post briefly explains Google's "modified Dutch auction" and pokes fun at the obscurity of it all:
The thing about this kind of auction is that we investors will be putting the first numbers on the table, each bidder telling Google how much he or she would be willing to pay per share. Then, as befits a search site that uses secret, complex mathematical formulas to find data, Google co-founders Larry Page and Sergey Brin and their advisers will use a secret, complex mathematical formula to pick the dollar figure they like. If we guess right, we may -- only may, for reasons that are also secret and complex -- win the right to send our money to the guys at Google. |
How do auctions work? - 5/04/2004 10:42:15 AM
This site describes the different types of auctions (Dutch, English, Yankee, etc.). Google is planning to use a Dutch auction, where all bidders pay the price of the lowest successful bid.
If you're really interested in the mechanics, this IBM paper (PDF) describes the design of an internet auction system. |
Google changing investment banking practices - 5/03/2004 10:09:53 PM
A Washington Post article, Events May Signal Change in Stock Offerings, contrasts Googles offering to the verdict rendered today in the Frank Quattrone trial.
Quattrone is the symbol of all that was Evil and Corrupt in the investment banking world--"laddering" or spinning low-priced IPO shares to favored clients, who then make huge windfall profits when the shares are offered to the public. Columbia University law professor John C. Coffee Jr. said Google's decision to award shares through an auction open to small investors indicates that some forces are moving ahead of regulators to address the perception that the IPO process benefits Wall Street firms and their friends rather than the companies going public and individual investors. "I do think we are starting to move away from a system that gives all the profits to intermediaries," he said. Google's offering may change the way investment banks operate: Among other things, it could discourage firms from setting artificially low prices on IPO shares. This practice allows for big one-day price "pops" on the open market and thus big profits for people fortunate enough to hold the initial shares. But such low-balling also often angers the companies going public because it demonstrates that they could have sold their shares at higher prices. The New York Times has a similar piece. Quattrone was convicted, his employer (First Boston) paid a $100M fine, and new rules were implemented to control the abuse. But imposing changes by law can only do so much: Google ... wants to play by different rules. It proposes to sell its shares in a version of a Dutch auction. That means any investor - whether the best friend of the lead underwriter or a small investor in Fargo, N.D. - should have an equal chance of buying shares at the offering price. The auction will set the price. By the nature of a Dutch offering, investors will know that they probably can buy in the aftermarket at a price comparable to the offering price - just as investors who buy any stock now trading, whether General Motors or Yahoo, know that the market price tomorrow is likely to be pretty close to today's price. The risk in the auction process is of setting a price that will appear too high within days. |
Big pension fund critical of Google structure - 5/03/2004 08:04:48 PM
This article in the Financial Times quotes TIAA-Cref, a $300B pension fund:
There should be a substantial discount for corporate governance deficiencies," said Peter Clapman, senior vice-president and chief counsel for corporate governance.... This structure effectively disenfranchises outside shareholders. Bob Monks, a corporate governance activist said the structure is "stupid" and Google's management "poorly advised". This in contrast to Warren Buffet's glowing endorsement (see prior post). |
Google IPO Q&A - 5/03/2004 07:04:27 AM
The San Francisco Chronicale has a short Q&A on buying Google shares. It pretty much just summarizes generally known information, but it's nice to have it all in one place: So, you think you want to buy Google stock?
The usual cautionary words are here: IPOs statistically underperform the market, this offering is more likely to be fully priced and not "pop" the first day, you'll be buying shares with one-tenth the voting rights of the insiders' shares, etc. |
gmail user IDs for sale on ebay - 5/03/2004 06:48:56 AM
gmail beta testers are selling their accounts on ebay. This item Google's GMAIL 1 GB Free Email Account Invite was going for $152.50.
Slashdot has a post on this as well which refers to to an article on c|net. At the time of this posting, there were 189 gmail addresses for sale. Looks like hackers@gmail.com is up for sale. So domain squatting will give way to gmail squatting? |
Warren Buffett praises Google governance - 5/02/2004 06:46:00 PM
In an article in the Financial Times (London), Warren Buffett, the well respected chairman of Berkshire Hathaway, praised Google's corporte governance structure. Buffett is the second richest person in the world, just behind Microsoft's Bill Gates.
Google's prospectus contains a fairly lengthy "owners manual" very similar to Berkshire's communications to shareholders. Google identifies Berkshire as one of their role models. Buffet says: I am very pleased that the fellows at Google said they were influenced by the [Berkshire] owners manual." "I liked their prose," said Mr Buffett. "It pleases us enormously that other people think it is a good idea to talk to their owners in a very straight-forward manner. I think more companies ought to do it." But Buffett and his partner, Charlie Munger, warned about the dangers of IPOs for individuals: "In an IPO the sellers decide when to come to market so it's way less likely that it's going to come at a time that suits you," he said. Charlie Munger, Mr Buffett's outspoken partner, added: "The average person buying IPOs is going to get creamed." From the FT article: Larry Page and Sergei Brin, Google's founders, last week outlined plans for an unusual public auction of their shares using a corporate structure which deliberately challenges traditional Wall Street orthodoxy. Like Berkshire Hathaway, they will refuse to give earnings guidance or aim for stable profits growth, and will create two classes of shareholders to protect management independence. |
| buygoogle.com |