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Allan Sloan

Don't Get Caught Up in Googlemania

By Allan Sloan
Tuesday, August 3, 2004; Page E03

I rarely make recommendations about specific stocks, because I've got no business advising total strangers about what to do with their money when I have enough trouble figuring out how to invest my own. But with Googlemania raging and my vacation at hand, I'll offer up a piece of advice as I head to the beach: Don't buy Google at its initial public offering.

If you want to own Google, wait until the dust has settled and the hype machine has moved on. Before the year is out, I'm sure, you'll have a chance to buy Google for less than its IPO price. Possibly much less. So be patient. You'll have to pay a brokerage commission on any shares you buy post-IPO (the initial distribution will be commission-free), but you'll still come out ahead by waiting.

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_____Google In The News_____
Google Offers Post-IPO Scenario (The Washington Post, Aug 6, 2004)
A Peek Inside Google's Prospectus (The Washington Post, Jul 28, 2004)
Virus Overwhelms Google, 3 Other Search Engines (The Washington Post, Jul 27, 2004)
Complete Coverage: Google
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Why do I say this? Because Google's IPO price is just too high to be sustained. The price, $108 to $135 a share, assumes that things will go swimmingly for years and years -- and that almost never happens. That's especially true when it comes to something like Internet search engines, where competitors can spring up like mushrooms overnight. Say, the way Google did.

Unlike most of the highly hyped Internet offerings during the stock market bubble, Google is a real company with real profits. But 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.

A price of $135 a share would give Google a stock market value in the neighborhood of $36 billion. A pretty ritzy neighborhood. At Thursday's prices, a $36 billion Google would have been selling a bit above McDonald's and a bit below Walgreen, according to Aronson+Johnson+Ortiz, a Philadelphia money manager. Burgers and drugstores will be around decades from now. Google? Who knows?

Yes, Google's profit and revenue have been exploding -- from $7 million on $86 million of revenue in 2001, its first profitable year, to $191 million on revenue of $2.26 billion in the 12 months ended June 30. (All year-ended-June-30 numbers are mine, derived from Google filings.) But Google's not a small start-up anymore. Limiting factors are already setting in. For Google's profit and revenue to match its rate for the past 2 1/2 years, the company would have to show profit of more than $5 billion in 2006 on revenue of $60 billion. What are the chances? Slim and none.

Google's profit is likely to grow -- but not at remotely that rate. This despite the fact that Google has almost a quarter-billion dollars of built-in profit growth for 2006 because of the way it has accounted for the stock options that it granted as a private company. I'll spare you the details and give you the conclusion: This "stock compensation expense" is projected by Google to fall to $67 million in 2006 from $310 million in the 12 months ended June 30.

It's impressive that Google has been charging those expenses to its profit, and doing so as rapidly as it can. But by accelerating the charges rather than taking them evenly year by year, Google has taken its bigger earnings hits as a private company, and its expenses will drop as a public company. Google says it's a different kind of company. But that doesn't mean it doesn't want to put the best face on things.

Google, by the way, says in its filings pretty much what I'm saying. It warns that its profit and revenue growth rates will slow down. It warns -- in italics, even -- that "you should not expect to sell Google shares for a profit shortly after Google's IPO. . . . Even in the long term, the trading price of Google's stock may decline." Hot IPOs during the market bubble were virtually certain to rise quickly the first few days of trading. But Google's "Dutch auction" offering is designed to forestall that.

Meanwhile, consider Yahoo. As a company, Yahoo has come a long way since the market bubble. As a stock, it's down around 70 percent from its peak in 1999-2000. It shows how you can lose money by overpaying for the stock of a company that turns out to be good. There's a lesson here.

Notice that I've not talked about Google's business prospects. That's because I don't know how Google will do against Microsoft, Yahoo and other competitors known and unknown. But I do know that the IPO price is going to be way too rich for me. And that unless you enjoy losing money, it's going to be way too rich for you, too.

Sloan is Newsweek's Wall Street editor. His e-mail address is sloan@panix.com.


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