Is it time to short Google stock?
Looking at GOOG stock after hours, it is once again at its all time highs of about $700 per share.
The metrics to me just do not make a ton of sense. It is trading at 54 times earnings and almost 20 times REVENUE, absolutely insane for a company thats growth curve has to slow and sooner rather than later.
Now I ask myself what major advertiser in this country or even the major economic countries is not yet advertising on Google. What company is going to come in and continue to push up CPC’s?
Absent continued quality score ‘adjustments’ how is this company going to drive further significant earning growth? Sure their is a little opportunity over seas that has not yet been exploited, but it is not like they have not yet launched in every major country. Some of its biggest spenders are financial and automotive companies that rely on availability of credit. These companies are in the midst of a huge mess and are probably not trying to figure out ways to raise their search engine exposure. A lot of major corporate spenders after years of too good to be true margins from search are starting to see that the CPC inflation has caught up ROI on search with other advertising mediums is starting to be more equalized. Throw in that search is a finite volume when compared to mass media or direct mail or even banner ads and that compunds the problem.
Google is trying to expand via acquisition, but more of them have turned into economics busts than revenue streams. Things like Grand Central, YouTube, Dodgeball, Orkut, Blogger and Dmarc just dont seem to be driving new revenue growth. Doubleclick is not looking like a sure bet to close. Yahoo and MSN are driving up the price of things like MySpace and Ask syndication deals, AOL is slowly crumbling, and publisher programs from YSM and MSN and Quigo are squeezing once lucrative Adsense margins.
They have failed to execute well on any of their offline initiatives, like radio, TV, print etc. Even so, the margins there are bound to be much much smaller than online revenues and thus the very attractive profit margins will not translate even if they can execute.
Google employees (the truly valuable ones who built the company) seem to be jumping ship on a regular basis leaving the company with a giant sucking sound at the top and middle layers of management and a whole lot of people who seem full of themselves just because they were employee number 7437 and are worth half a million in stock.
I am not saying this stock is not going to 800 or even 1000, much less sane things have happened in the stock market. I am just saying that the visible metrics and ancillary products don’t seem to be going at a pace to sustain the blistering growth that Wall Street expects.
As an ex-derivatives trader I know there are dozens of ways to short the stock while still limiting losses to the upside. The real trick is predicting the quarter when Google misses earning the first time and the air comes racing out of the bubble. I have not yet found the perfect trade, but I am thinking buying a near term out of the money call and combining that with a short of the stock. That way if I am right and it tumbles to $300-$400 range (a sensible valuation IMO) then I make out, but if it takes off or even stays relatively neutral, I am not risking significant amounts of money.
The actual trade will probably be significantly more complex like short a just out of the money call, then use that credit to buy 2 out of the money calls 50 or so points higher for even, plus sell the stock. LIke I said, I dont yet have the trade, but I am starting to look…
November 29th, 2007 at 10:39 pm
When they miss I’m pretty sure it will be a “surprise” so why not just wait till the news hits. Sure you will miss a little because it will probably gap down huge, but just short it after lunch because you know that pig will tank eod and trend down for at least a week.
November 29th, 2007 at 11:59 pm
Honestly, even at those multiples, I seriously believe that Google is still undervalued. Given their limited penetration in Russia, India, China, the Middle East, and many “wealthier” parts of Western Europe, I believe there is significant room for further growth. Granted the income levels of many of those aforementioned countries is fractional as compared to US/UK/etc., but their sheer population numbers are staggering and cannot be overlooked. Furthermore, as computers and broadband become commodities (eg. Sysmar710), the worldwide adoption of the internet will accelerate at an exponential rate that I don’t believe is currently priced in. Finally, and let’s face it, Google hasn’t “optimized” their current revenue streams to their potential.
Also, I believe their entry into green power space provides (at least) a viable opportunity given they are one of the few companies with the war chest to take it on.
Truth be told though, I’ll be shorting in the near term and buying back down the road.
November 30th, 2007 at 12:44 am
Diorex,
Nice! I didn’t know you have a financial/trading background. I also spent many years in that space. A few months back I did make some money playing GOOG to the downside (also played Goldman Sachs). This was done through options only (put and call spreads). As the cost and direct exposure via the equity instruments had large exposure.
As much as I think GOOG is a well run company there is no question in my mind that this thing is one press release away from having a few hundred points taken off.
Some of the acquisitions that GOOG has made have me thinking, why? But, they have have a smart group of corporate development guys that definitely buy best of breed (imo). May be there is a great scheme somewhere down the road; plus all these acquisitions don’t add up to more than a rounding error on GOOG’s balance sheet anyway. Even a $5B acquisition would be less than 2% of Google today.
I also agree with you that the DoubleClick acquisition may not go through. As a matter of fact if I had a vote I would vote against it.
Leverage - yes, there is other growth that Google can achieve outside the USA. But, IMO India, Turkey , Russia, Eastern Europe are garbage markets. There is so much fraud and corruption in those markets that the perceived growth may not be worth the hassle. China and Latin America are probbaly best bets and also I believe the top two growth markets with respect to new internet access/penetration.
Alex
November 30th, 2007 at 3:04 am
The big wild card, as I see it, is Google’s ability to increase their earnings with a few keystrokes (perhaps a bit of an exaggeration.) How hard is it for them to chop a few percentage points away from publisher’s earnings or add a few pennies onto advertiser’s average CPCs?
My guess is this has been a big contributer to their “surprise” quarterly earnings for a while now. Something just isn’t right when I hear about domainers and high quality content site owners seeing flat revenues over the past 12 months while online advertising is supposed to be growing at double digit rates. All of us involved in PPC advertising have been plenty suspicious of Google’s smart pricing for a while now.
November 30th, 2007 at 8:23 am
I have thoughts to almost all the comments, but Andrew nailed what I was thinking but failed to state eloquently.
I believe that Google has been manipulating results through quality score for a very long time and there is only so much manipulation a market can take. I have recently noticed several long term major players in my niche significantly dial back bids or leave the PPC space altogether.
November 30th, 2007 at 9:40 am
Diorex,
Another great reason to read your blog (with your finance background). I see why you are very analytical minded from reading all of your blog posts. Good stuff.
I’m full time affiliate marketer now but former job was working for major earnings estimate company (rather not disclose the name). I went to school for finance.
Anyways, I’ve seen too many people lose everything back in 2001-2002. (Long story).
I personally will not short GOOG near future. My reasons are:
There are ~30 analysts covering GOOG’s stock at buy or hold, none are going to make fool of themselves and downgrade to sell rating.
Too many institutional money involved and Google will not allow themselves to make history and miss their earnings for the first time. I personally don’t see this happening in 08′ - 09′.
With so much cash on hand and no debt, they have too many variables/options to manipulate the balance sheet. (If this ever comes down to it).
Plus, most companies will move on to only state their earnings once a year not quarterly. “Future Outlook” is far more important than “Current numbers”
What “if”, we have seen things go burst with dot com. Eventually something so good will eventually come down and we are seeing this now with real estate market. So if Google does miss their earnings, we will definitely see panic selling from individual investors. Not immediate sell from institutional buyers (they could see this as potential reinvestment). Tough call to make.
I was told long time ago from my mentor: “You can always find safety in a risky market if you just look deep enough” There are far better short selling opportunities out there.