This column was originally published on RealMoney on Jan. 9 at 2:42 p.m. EST. It's being republished as a bonus for TheStreet.com readers.
market cap, which today touched the $140 billion level,completely detached from reality?
Is there any way possible that this company -- in existence forless time than Kobe Bryant's been playing in the NBA -- is actually worth 140,000,000,000 dollars?
For owners, traders and player-hating Google shorts, that's really the onlyquestion. There's no question that Google has delivered some of the mostamazing growth Wall Street has ever seen. And there's no questionthat, with the company positioned as the content-agnostic
gatekeeper to all the world's content,Google's fundamental prospects shine with visible hypergrowth prospectsthat few, if any, companies have ever rivaled.
But $140 billion?
Let's put that number in context even further, using what I call the"Google Relative Valuation Game":
At $470 per share, Google is worth:
- Almost 10 Broadcoms (BRCM) .
- More than 40 Dow Joneses (DJ) .
Obviously the market has recognized the incredible earnings potentialof this company, and that is what has me increasingly worried about mylong-held long. Wall Street often extrapolates trends out much further andfor much longer than any rational person would expect, as fear and greedreally do drive so much at the market.
As Aaron Task noted in a dialoguewith me early on Monday, you don't have to think back very hard to findstocks from the bubble of the late 1990s that used to dwarf BerkshireHathaway's market back then too. My favorite memory is one he alsohighlighted -- "Internet incubator"
Internet Capital Group
-- which, at its peak in 2000, was worth just a little more than Google is valued attoday.
Google is -- without a doubt -- no ICGE. Google is not built on hype andinflated dreams, as ICGE and so many of its brethren from the bubble were.This company, Google, isn't "going to" change the world. It
, and there will be no going back from this world whereGoogleis a major force in tech and media (and perhaps all kinds of otherindustries from finance to software).
But that doesn't mean it's a good stock to buy at $470 a share, despite mystaying long it.
I expect Google to earn far more in the next five years than the Streetbelieves it will. But my most optimistic scenario would put earnings for2007 somewhere around $13 a share (again, that's being
optimistic), and that gives Google a P/E of 36 times
year'sbest-case scenario earnings. Gulp.
Because I do have such high expectations for Google's long-term earningsprofile, I'm sure not looking to pull the plug on my long. The business ison fire now and will continue to be so in 2006, and I'd much rather be longthan short this name. But there's nothing wrong with taking something offthe table after such a big run, and that's what I continue to do.
I didn't have as many Google calls as I would have liked during this lasthuge rally (do we ever have enough ofthe winners? No, of course not), and rather than selling them and/orrolling them up when they expired last month, I simply exercised them. I'dactually like to buy some Google puts here rather than just selling mycommon, but the premiums on the options in this name are simply outrageous.
Another strategy to employ would be to short some calls against my commonstock. But with as much momentum as this stock has had -- and becausethe business has been so incredibly strong -- I don't want to fight WallStreet if it continues to run this stock higher in the near term.So I trim. And trim a little more.
At the time of publication, the firm in which Willard is a partner was net long Google, Cisco, Microsoft and Broadcom, although positions can change at any time and without notice.
Cody Willard is a partner in a buy-side firm and a contributor to TheStreet.com's RealMoney.
He also produces a premium product for TheStreet.com called
The Telecom Connection and is the founder of Teleconomics.com. The firm in which Willard is a partner may, from time to time, have long or short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in his columns.None of the information in this column constitutes, or is intended to constitute, a recommendation by Willard of any particular security or trading strategy or a determination by Willard that any security or trading strategy is suitable for any specific person. Willard appreciates your feedback --
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