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Friday, March 1, 2024

Google – Next weeks action… Next decade’s action

Mailbag: “Where is Google going next week?”

I am certainly not saying this stock will go up in a straight line, we expect it to bounce down from $399, perhaps going all the way back to $360, but as soon as that peters out (unless the company does something monumentally stupid like buying AOL) we will be doing a Jim Cramer “Mo Back” on this stock all the way to $450.

There are a hell of a lot of people hanging their hats on short positions based on a low volume weekly “hanging man” trend reversal but the daily chart looks more like a bullish reversal happened on Thursday.

Friday’s holiday action was essentially meaningless, if the Europeans are buying on Monday you will have a good indication of where we are going for the day.

Long term PPO has got a lot of steam left while short term stochastics say oversold.

If Google buys AOL next week I will scream and curse and short them to $360 but outside of that or some other horrifying news, we will break $399 before turning back. If the stock goes to $406 then it is all over for the shorts until we get close to $450 and by then it may be earnings time again!

Google “only” has $6bn in sales but that is out of a $500bn media space. They already have sales per share numbers that are double the other media and, of course, they are actually growing vs. all competition.

Soon it will occur to analysts that more people see Google ads per day than all the magazines and newspapers on the planet (oh yes, the world media market is over a $Trillion and Google is certainly a world player) and then they will all up their estimates again…

Google is not like anything anyone has ever seen before so valuation models that analysts have lived their lives with don’t really work. To value Google you have to think about companies who really changed the world in their time like IBM, Bell Telephone, Edison Electric, Microsoft…

When Mirosoft went public they had a similar action to google as they went from $1 to $3 in their first 10 years. In Mid 1991 they began to take off, Google Style and climbed again from $3 to $56 in 8 years. Thats a gain of more than the twice the early tripled value of the company every single year for 8 consecutive years!!!

Now I’m not saying that Google will go from $400 to $1,200, to $2,000, to $3,000 by 2010 but they already have 10% of Microsoft’s current sales and make more profit than Microsoft did in its first 10 years.

In fact, Google will easily surpass Yahoo in profits next year and Yahoo is up 40x from it’s IPO in 1996 (it was once 80x).

But Phil“, you say, “you are comparing apples to oranges, Yahoo’s market cap, after being around for 10 years is 1/2 of Google’s.

You are correct, I will not sit here and be the first to say that in 10 years Google will be worth 40 x $85 (not that anyone actually was able to get it for $85, but that’s another conversaition) which would be $3,500 a share. That would just seem silly and would imply that they will make $35 a share or about $10bn a year. Where would that money ever come from? Why that would be almost as much as Exon makes in a quarter!

Sales would have to grow at 25% for 9 years (don’t take my word for it, do the math!) for them to make that kind of money and they’ve only been growing at 50% so far (hmm, i seem to be losing this arguement to myself).

But what about inflation? If inflation is 3% then in ten years they will automatically add 40% the end result so the real target for earnings, to get to that ridiculous valuation, is about $24 per share in today’s money, which will require sustanined growth of 20%.

So I guess it will be a hard road to get to that magic $3,500 mark by 2015 unless they make some sneaky acquisitions or come up with some other way to double sales in the near term because, if they double the business early on, they will only have to grow half as fast to hit that target.

I’m sure all these discussions were had for the 8 straight years (90-98) in which Berkshire Hathaway went from a ridiculous $5,000 a share to a really silly $80,000 a share. When they dipped from $19,000 to $17,000 in 1994 I’m sure the shorts were partying in the streets. By the end of 1994 the stock was at $20,000 and in 1996 it was crossed $35,000 before pulling back and making a solid run to $80K.

So I guess I’ve talked myself into being long on Google. As long as you can ride out a few bumps, it could be a hell of a ride.

Back to Exxon – lets forget about them, they make $10 every time you drive past a station.

To get to $3,500 Google will need to make $10 from 1Bn customers over the course of a year.

HBO, Sirius, Verizon, The Times, your stock newsletter, 20 waiters and other service people… all get more than that from you EVERY SINGLE MONTH!

Those Google guys are smart, whether through advertising or by providing a service you are willing to pay for, they will eventually figure out how to make $0.03 a day from your patronage.

Just give them a decade to work out the bugs…

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