Friday, December 15, 2006

Google's Share Price is Unsupportable

Google's share price is currently $482. Their price-to-earnings ratio is about 70. For those unfamiliar with PE ratios, 70 is appropriate for a start up that is about to explode all over the market. A big company with a 70 indicates a possible over-valuing of the stock, like Amazon had back when it was around $100 per share.

At first I thought that Google was appropriately valued. I started using many of their services, such as their document and spreadsheet editors on line. I like Blogger, despite its hiccups with uploading photos. The transition to the new version of Blogger has changed my mind.

Blogger has rolled out a new, improved version and users are beginning to convert over. I tried when prompted by Blogger about a week ago, but after a while it came back and said it was unable to convert my blog and I would have to wait. I thought nothing of it and went on using the old version. Now there is a massive wave of people who have not converted, but can't leave comments on sites with the new version of Blogger. This is indicative of serious software development problems at Google.

Software development is a fairly mature technology. There are accepted processes used by large software development firms for configuration management, testing and code reviews. There are even metrics for determining just how sophisticated your group is at software development called Capability Maturity Model Integration (CMMI) levels.

Where I work, we strive to be CMMI level 3 in our software efforts. We are not a software house, so we're not the most sophisticated of developers. In spite of this, an error like the commenting problem would never occur with our code. These errors, like the photo uploads before them, are indicative of very poor internal processes and a culture of sloppiness. Such a culture is no joke to change. It's reasonable to assume that much of Google's code base is in similar disarray. Poor software practices are rarely confined to single groups, particularly on something as prominent as Blogger. For a product that delivers the ability to allow people to broadcast their message globally, you would expect significant corporate oversight into the project. The fact that Blogger has so many bugs suggests that the rest of the company's products can't be much better.

I'd buy a stock with a PE of 70 only if I knew for sure that they had sustainable, long-term, strong growth ahead of them and I knew their products to be of high quality. I can see strong short-term growth with Google, but if their products continue to be so shoddy, I don't see support for such an inflated stock price.


Hyman said...

OMG!! Thank you, KT for ending my mystery as to why I can't comment on some blogs anymore!! I was going out of my mind trying to figure it out. I assumed that my non-upgrading ways were the reason why, but who knew for sure. Now I can stop banging my head on my desk. Thanks!

Justin said...

The comment problem is simple.

Google bought Blogger, it didn't start it from scratch. The old version, which pre-dates Google buying Blogger, used their own accounts. The new version is implementing Google's "global" accounts. That's why you can't login and post comments.

Along the same lines, when I click to comment on your blog, I have to click a link to "sign in with my Google account."

Is that fair? Is that right? Maybe not, but when you transition to a new account type, those kinds of temporary incontinences happen.

The keyword is temporary.

K T Cat said...

Justin, thanks for the info. I didn't know Google had bought Blogger. In any case, I'd suggest that a PE of 70 is preposterous for any company with a gross income above $100M. You simply can't grow fast or far enough to make it realistic. An average PE is about 12. Microsoft, the company that seems to simply print money in the basement, has a PE of about 20. A PE of 35 or so for Google would be more reasonable.

Stocks are as based on gambling and mob psychology as much as business analysis, so this kind of bubble isn't too unusual. I remember almost buying into the Amazon frenzy at it's very peak.

Anonymous said...

Hi Tom,

I don't think you're looking closely enough at the data. If you look at last years quarterly earnings for Google they are 1.54, 2.29, 2.49, 2.62. The next quarter will include the xmas holiday and likely exceed 2.62 by some portion. Suddenly you are down to around 40-50 times earnings, still high, but not unreasonable if you think online advertising is a growth business.

In contrast if you look at Amazon's historical earnings you don't ever see that pattern of growth in earnings. That's why one is growth company, the other was a bubble. Ha, and you are a well educated employee creating content for them at less than minimum wage, how smart are they!


K T Cat said...

Brian, you're right to a point about me creating content for them for free. However, I'm way down the long tail. If you look at the top blog sites, you'll see they all have moved to their own servers and systems and advertising sources. If Google is counting on blogs like mine to generate revenue to support a PE of 70, they best keep looking.

Unknown said...

funny thing to share KT . . . I just did my final essay in gen business class that was based in part on p/e ratios of three businesses, although none of them google. they were companies i was looking into investing into when i cash in my cracker barrel stock . . .massey energy from here in WV was one . . . i was looking for coal industry companies as some think it is the future with the improvement of scrubbers for the coal burning power plants in our area (reduce pollution) and the increase in the price of oil.

my grandparents burned coal and i have things of theirs in a curio cabinet that still smells of coal. that's a little off track but interesting item about me. stop by again sometime. . .