Google: All Wrong

This is probably going to be the only post you can find on the web telling you to sell Google. That’s right SELL Google. It isn’t because I think Google is a bad company, or that they won’t grow over the next few years but they’ve become so over valued that you shouldn’t possibly think about buying the stock.

Growth and Value: When you talk about growth stocks there’s a rule of thumb to use when looking at the P/E ratio of a company it should never be higher than double the growth rate. For example, if a company is growing at 30% per year you should never pay more than 60 times their earnings, or a P/E of 60. If a company’s growth is slowing like Google you should pay less. Google great around 100% last year and is growing around 40% this year. I wouldn’t pay more than a 40 P/E ratio right now for Google which would mean the stock would have to drop to around $500 per share for me to find this a value.

Realistic Growth: When companies start to get very large we need to take a step back and look at whether they can realistically reach earnings numbers when they are at maturity. If we compare Google to other industries banks are the best comparison. Neither has real capital equipment and most of their earnings are on paper. When valuing industrial companies they have assets to sell if they go bankrupt. Google has very few tangible assets. This means they should eventually be able to reach a P/E ratio of 10. A market cap of $210 billion would require $21 billion in annual earnings in the future. For this to happen they would need to have more revenue than the four major TV networks combined. Put another way Google would need to grow revenues at 30% for the next eight years. This isn’t realistic growth.

Competition: Eventually every business has competition which lowers margins and takes market share. Thus far on the web Google has had the benefit of no real competition. But one of these days a competitor will arise and Google will have to deal with lower margins.

I may be the only one who isn’t drinking the Google Kool-Aid but this Mayor is telling you not to buy.