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Savings Experiment: Snow RemovalYesterday I suggested Google buy Starbucks. I was very serious about that although clearly Starbucks would view that as a hostile takeover and would fight it every step of the way. If you missed it see, "Google should buy Starbucks -- Now!"
In the article I discussed my equivalency test and listed a group of stocks that combined would equal Google's capitalization of $127.5 billion. I added a resort hotel to the aggregated seven stocks just to round it out. My idea was to point out that you can own great companies with growth potential, strong brands, diversification, known risks (as opposed to unknown or minimally understood risks) and much more predictability. Risk is NOT required for high reward! See any one of Berkshire Hathaway's annual reports.
THE GAME: If you too believe that Google is way over valued, let me know what group of stocks you think best demonstrate this by your own selection of a crop of names worth equivalent valuation.
Here are some basic ground rules:
- Limit your group of stocks to 5 to 8 picks with minimum capitalization of $1 billion using Tuesday's numbers.
- If you need to round out your picks like I did, you can add your own spice. This should not be to hard; seven Corvettes and seven Porches (for when you are in Europe) or perhaps a major golf course just for you and your friends. Or why not buy a pro basketball team? Well, that's been done. Obviously Marc Cuban would swap Google out in a heart beat.
- For simplicity use $125 billion valuation to represent Google's market cap.
If enough financial wizards respond I will pick the top three and give them credit on a Wednesday post and we can continue the discourse.
By the way: Monday, July 10, Piper Jaffray raised its earnings estimates for Google forecasting 2007 earnings of $12.63 a share and a price target of $600 per share. Amazing!!!! I have not passed along the analyst's name because there is a general feeling that these forecasts are as much for publicity as investment guidance. This forecast means the firm anticipates a forward-looking P/E ratio of 48. If it is correct, the capitalization of the company would grow to about $182 billion. If that happens it will make our equivalency test even more astounding next year!
It is fascinating to me that someone would guess about the product line, foreign expansion, sales, market share, impact of options and interest rates, competition, growth, and the weather, and then calculate a future valuation. It is based on factoring in at least a dozen unknown variables to arrive at a fixed number to the penny (not even a range). Guess 'A' , multiplied by guess 'B' , multiplied by guess 'C', and so forth = fact? -- oh yeah that's believable!
Wall Street counts on investors not holding analysts accountable. Could you imagine what would happen if analysts actually were forced to act on their predictions and put their money where their mouth is? I am expecting soon we will be hearing that some analyst has raised his estimates on Google to the point that it will be half the Gross National Product (GNP) all by itself. I hope that happens because then we can trade it to China or India and balance the trade deficit.
The GAME PART 2: Where do you think GOOG will be priced in 12 months and why? I have no idea what the market will pay for a share of Google in the near term. In the long term I believe it will be less. However, I know it is highly unpredictable and someone is buying the shares and supporting the dream.
Disclosure: I have no position in Google, long or short.
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Reader Comments (Page 1 of 1)
7-11-2006 @ 11:37AM
Peter Cohan said...
Google is worth more than two Berkshire Hathaways. BRK.A's market cap is about $115 billion. BRK.A's sales are $87 billion -- 11.4 times GOOG's. And its profits are $9.5 billion -- 4.6 times GOOG's.