'RealMoney' Radio Recap: Google Brings Out the Needy
What a tough life the Google (GOOG) bears must have, Jim Cramer mused on his "RealMoney" radio show Wednesday. The bears hated Google at $150, despised it at $250, wanted to crush it at $350 and can't bear to see it now above $420, he said.
How the bears got it wrong, said Cramer, is by not understanding the mechanics of growth-fund investing. Cramer's thesis for valuing stocks starts with the "necessity issue," and Google is a stock that growth-fund managers must own to keep up with their performance benchmarks, he said. Google's accelerating revenue growth and the dearth of stocks with that kind of growth -- plus the high visibility of the stock -- means managers are compelled to own it, said Cramer. If you approach Google's valuation like that, you "have a starting point for understanding" the stock's rise.
Cramer said growth-fund managers "only know comparison shopping," and they accept the valuations the market places on similar stocks. Bears who say Google "can't be worth X, no matter what" are using circular reasoning, said Cramer. A stock is worth what the market is paying, he said.
More importantly, though, if a growth-fund manager owns a stock with inferior growth statistics to Google but is paying more for that stock relative to its growth than for Google, the manager is likely to sell it and buy Google, said Cramer. "That's why Google's rise seems inexorable to me. You still have lots of stocks that are more expensive than Google with growth stats that aren't as good," he said.Cramer said that although earnings can slip up -- and even though he has used a multiple of 50 as the value he is willing to place on Google's earnings -- for most of his life, he has actually "used the rule of thumb of twice the growth rate as the upper limit for the price-to-earnings ratio." Google is growing at 33%, he said, so "that means I should be willing to pay 66 times earnings for Google." He hasn't talked about that, though, "because I don't want to sound too absurd, even though I know it's the logic behind many of the buyers."
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