How much should Google's stock be worth?

August 6, 2004 9:18 AM

Amateur economists, VCs, MBA students: what's a fair price for a google share? Based on what assumptions?

Some background info to assist your calculations. Centrally from this NYTimes article:

• 24.6 million shares will be sold
• The distribution structure will be Dutch Auction, where (basically) the top 24.6 million bids will get a share, but only pay the amount of the 24.6 millionth-place bid.
• They hope to make around $3 billion, so that puts the expected share price at over $100.

I'll start the estimating with an extremely simple calculation, assuming that a stock "should" have a P/E ratio of no more than 20. Based on earnings of $105.6M last year, this puts the (backwards-looking) "correct" market cap at $2.1B, for a share price of around $85. So maybe the $100+ isn't so unreasonable if you expect the earnings to increase this year?

posted by rkent to work & money (13 comments total)

Not according to Newsweek. They say: "even at $108 a share, the bottom of the projected range in Google's most recent SEC filing, the price is insane. I don't see how a long-term investor can make out well paying anything like the IPO price, which, I suspect, will approach $135 a share, the top of the range. "
posted by GaelFC at 9:29 AM on August 6, 2004

The "value" of anything is simply the range that buyers would be willing to pay if the item were on the market.

So a google share is worth $135.00 if it can be sold for that much.

Now, if your question is "will the value of a share of google likely be higher than $108-$135 in the near future," then a different kind of answer is appropriate.
posted by yesster at 9:48 AM on August 6, 2004

Yes, yesster, but that pure market interpretation of value is a bit disingenuous in the US stock market in particular, where there are many known and often-used formulas for calculating the "appropriate" value of issues. Ratios like price-to-sales, price-to-earnings growth, price-to-book, as well as estimates like 5-year earnings growth potential, various discount rates, etc.

So I guess what I'm really asking is, for those who follow the stock market, what would you personally pay for a google share, and what criteria would you use to determine that price?
posted by rkent at 9:56 AM on August 6, 2004

Personally, I think that is an insane IPO price and they can kiss my ass. I hope they lose money on the deal somehow. I love google, but it seems to me they are raping the public.
posted by pissfactory at 10:06 AM on August 6, 2004

Now, if your question is "will the value of a share of google likely be higher than $108-$135 in the near future," then a different kind of answer is appropriate.

Yes and No. In an efficient market, the future expected value of the share is already embodied in the present value. I think rkent is asking whether this share price is 'rational' based on reasonable assumptions. Besides a fundamental analysis (revenues, eps, p/e, etc) other things to consider are:

*Revenue growth curve based on the market and the expected share Google will hold in that market. Keep in mind that nearly all (98%) of Google's revenues are from advertising. Thats a fickle market.

*Comparison against competitors. I'd say Yahoo has the closest business model. Yahoo has a market cap of 36 Billion and is trading at almost twice what it was a year ago.
Can Google tap into Yahoo $2.6B revenue stream? Maybe. Yahoo has a lot of locked-in users still and I consider the whole Gmail thing generally a bust - Yahoo showed (by offering 100M email) that it could respond very quickly to changing market conditions. That, and the fact that Google's search engine has become less useful leaves huge room for doubt.

*Share price. $100 bucks is expensive but a series of stock splits could take care of that quickly and provide more liquidity.

*Would I buy? No. Its not a bad investment but there are better ones out there.
posted by vacapinta at 10:09 AM on August 6, 2004

Based on earnings of $105.6M last year, this puts the (backwards-looking) "correct" market cap at $2.1B, for a share price of around $85.

Are you sure about that?

Google is only offering a small number of shares to the public, about 24.6 million of its expected 268.5 million shares outstanding.

Strangely, I can't find out how many of the 243.9 million shares not being sold to the public will be held in the corporate treasury. I would bet that nearly all of the 244 million shares will be held by insiders and employees (not the corporation), so they will be dilutive.*

So lets recheck the math: 270 million shares* $120/share = 32 Billion dollars.

32,000,000,000 (price)/106,000,000 (trailing earnings)= 305 p/e ratio.

I haven't projected Google's earnings growth, but it would take some mighty strong earnings expansion to justify the price.

*Back of the envelope math and one unsupported assumption (about ownership of remaining shares) used in calculation. Accuracy not guaranteed.
posted by trharlan at 10:26 AM on August 6, 2004

pissfactory-- Google is raping no one. The public is raping itself. It's not Google's fault that people are willing to pay the ridiculous sums that are being suggested. In fact, by using a Dutch Auction, Google is putting a smaller proportion of money in the pockets of the investment banks (and their most favored brokerage clients) than any "hot" IPO in recent history.

yesster and rkent-- the two of you are playing semantics. A company is worth what someone is willing to pay for it, of course, but I think that rkent is asking what classical finance would dictate for the share price.

Despite all of the new-age valuation methods (using multiples of sales, or free cash flow, or revenue, etc), the most widely accepted (and time-honored) valuation approach is simply the sum of the present values of future cash flows.

To answer your question, rkent, one must first project the future earnings of Google. I do not know what Google's expansion plans are, and even if I did, I'd be hard pressed to project earnings for them. Give me some projected earnings, and I'll give you a value.
posted by trharlan at 10:38 AM on August 6, 2004

"Personally, I think that is an insane IPO price and they can kiss my ass. I hope they lose money on the deal somehow. I love google, but it seems to me they are raping the public."

How exactly is this "raping the public"? Three months ago, an average consumer could access Google and look up anything for free. Three months after the stock offering, a non-stock-owning average consumer will be able to access Google and look up anything for.... free.

Vacapinta is absolutely correct when he states that,

Keep in mind that nearly all (98%) of Google's revenues are from advertising. Thats a fickle market.

Will Google make money from this stock offering? Absolutely. Will it come at the cost of the general public? Nope. Their main source of income will still continue to be from advertising. But this now allow their employees to capitalize on the hard work and effort that they have been putting into the company for years. Additionally, it will allow some consumers--the ones who want to assume the risks that must be assumed if you want to own stock--to have the potential to make some money off of the company, as well.

Berkshire Hathaway didn't start selling its stock at $85,500 a share, but that is where it's at today. And look at a company like Amazon, that starting selling stock around $5 and watched it soar up to over $105. Is this company raping the consumer? A lot of consumers made a ton of money on that. Some lost it by holding on for too long, but again, that's not the company raping the consumer.

Tyco. Enron. Arthur Anderson. There are a lot of companies screwing over average consumers. Let's not piss on a company like Google that isn't.
posted by NotMyselfRightNow at 10:50 AM on August 6, 2004

I don't know any of the metrics supporting it, but one analyst whose been covering the google IPO was on cnbc yesterday (on the Kudlow & Cramer show) and he said that $90 was his "i'm buying" price. I forget who he worked for exactly, but it wasn't a brokerage or anything, and he qualified his statement by saying that his company doesn't make buy recommendations, this was just his personal opinion.
posted by rorycberger at 11:08 AM on August 6, 2004

The "value" of anything is simply the range that buyers would be willing to pay if the item were on the market

As vacapinta explained, this isn't true. It might be true for the casual investor, but certainly the Platonic concept of the price (there's a ticker that does flicker on the wall of a cave somewhere) would be the present value of future earnings (i.e., dividends), taking into consideration a best guest at the growth rate of those dividends.
posted by yerfatma at 11:15 AM on August 6, 2004

trharlan: Thanks for the money.com link! Unfortunately that makes a lot more sense: of course I shouldn't have assumed that *all* outstanding shares would be sold at the initial Dutch auction. And now I guess I'd agree with Newsweek that the anticipated price sounds pretty insane. Also from that page:

"Google earned $143 million, or 54 cents a diluted share, in the first half of 2004. Double that and you wind up with an earnings projection of $1.08 a share. Using the $121.50 midpoint of Google's price range, you wind up with a P/E of 112.5."

Just a bit above 20.
posted by rkent at 11:21 AM on August 6, 2004

"In a filing to the US market watchdog, Google said it had neglected to register almost 30 million shares and options issued to staff.


It is now offering to buy them back - albeit at prices way below the $108-$135 at which its flotation is set."


Given that Google is trying to trick its employees into giving away 30 million shares for peanuts, and the IPO covers 24 million shares, I think the right price is $ 0.

Or perhaps someone else could explain how fraud like this is part of the "do no evil" strategy?
posted by Kwantsar at 12:10 PM on August 6, 2004

Gambling on Google
posted by loquax at 1:01 PM on August 6, 2004