Wednesday, June 08, 2005

Om Malik's Broadband Blog : Bubble Watch: Google Bigger than Time Warner

The GOOG stock price ran to far too fast; there is nothing unusual about a fast growth company having a volatile stock price. The very idea that the Google market value is greater than the Time Warner Market value was clearly a sobering thought. Google traded down better than 4% today. The analyst estimate of only $6.46 per share this year contributed to the decline.


The reality is that TWX is about twice the size of Google. TWX must support $59.5 billion more in debt than does Google. The misleading headline that has been repeated thousands of times is like comparing two homeowners who have equity of $500,000. One home-owner's house is a million dollar home with a $500,000 mortgage and the other home-owner's house is a $500,000 home with a zero mortgage.

TWX has about 8 times the net income as Google but the revenue from several of its businesses is going down. Total TWX revenues are increasing by about 2% per year. Google grew revenues from 2003 to 2004 a 200% annual rate and continues to grow them at 20% or better. Google also enjoys higher margins. Google has a long way to go to catch TWX in terms of revenues or profits but assuming the TWX share price continues to be stuck at around 17, it will take a Google share price of $568 for the enterprise value of the two companies to be equal.

My comments on Random Roger's site are still valid. It makes no sense to try to short-term trade a super high growth stock. There are too many factors that can shoot the stock up or down quickly and irrationally. Owners need to adopt the Ken Fisher bucking bronco approach. If you are willing to own an ultra high priced ultra high growth stock, you must be willing to take the wild ride.

The comparison to Netscape is not valid. Netscape was a $19.95 product in competition with a similar but FREE product. One could switch from Netscape to Explorer in the blink of an eye. GOOGle performs a long list of services which are free to the consumer and which are relatively "sticky". Those who have set up AdWords or AdSense accounts have invested time and effort into a system that works. Those who have hundreds of archived blogs on a free server need a really good reason to switch. Those who have reams of data stored on free G-mail accounts are loyal to the service. In many ways, Google has captured an audience like EBAY. If you want to find x, y or z at auction, EBAY is the place. If you want find information quickly or deliver advertisements to targeted audiences, Google is the place. AOL and YAHO actually reported declines in advertising revenues while Google add revenues exploded.

Betting that any company is likely to grow at fast rates for years into the future is risky; but the potential rewards are great. Those who appreciated the power of desk-top PC software early, made fortunes off MSFT. Few believed MSFT would ever be as large as IBM.

TWX has assets; millions of cable subscribers, millions of magazine subscribers, millions of AOL subscribers and millions of eye balls visiting AIM and other free services. The company has decided to give away the AOL store; many services previously available only to paying subscribers will now be available to attract advertising dollars. TWX understands that if it does not change its ways, 250 magazines are going to go bust. What good are dead or dying assets?

GOOGLE must grow for years to have the book value of TWX. My family owns both stocks. Google has dramatically out-performed TWX since it came public. We do not believe the relative out-performance is over. In the near term, we will not be surprised if Google trades down 40 points or more from here. However, the up-side is still much bigger than the down-side. We will continue to hold the shares we bought on the opening, the shares bought at $130 and the ones bought at $190. Our guess is the stock is more likely to hit $440 than $240 within the next year.
In the meantime, we we will buy other stocks. With Google up 40% so quickly, it makes sense to hold for long-term gains (on the $190 position). At the same time, it makes sense to look for our next big profit in other areas.