Let's assume Google (GOOG: sentiment, chart, options) is truly "worth" $500 (and the writer of this piece certainly demonstrates that these valuation methodologies can be terribly flawed). Why would anyone want to own it at its current price of about $425 for the $75 upside when downside risk is clearly huge?
they would own it because (IF one believes the starting assumptions) at $500 GOOG is at "fair value". that doesn't mean GOOG trades at $500 for the next 20 years, but that FROM $500 GOOG would appreciate at the historical market rate of around 11% nominal, which was a 7% real compound rate last century. so at $500 even GOOG should be a buy, or at least a "Market Perform".
the problem, of course, is the ridiculous assumptions the analcysts must make to arrive at those calculations. individual investors should take heart that people on Wall Street listen to the likes of Meeker, with their pathetic fantasy analyses which presume to know what the Internet investment world will look like 10 years from now.
Mutual funds such as the one run by Mr. Miller are up to their eyeballs in Google shares
in fairness, it should be pointed out that Miller's Legg Mason Value fund has beaten the SPX for 15 years running--an unprecedented streak among the many thousands of mutual funds. i would be surprised if Schaeffer's record is anywhere near as consistent as Miller's.
one of the things Miller has done over the years is stray a long ways from traditional value investing to buy growth franchises he thought did not properly discount future earnings growth. whether GOOG works out well for him remains to be seen.
personally, i think GOOG is an overpriced advertising stock that will go down with the economy. it also seems overloved and underhated (shorted) as Schaeffer notes. even if it all works out great, i doubt it will provide a good forward return. QCOM printed $100 on Jan 3, 2000 because of all the great things that were supposed to happen to it over the next decade. well, all those great things happened and the stock is now at $40--that's a 60% haircut on nominal value and more like a 75% haircut in real terms. and investors had to endure an 88% drawdown from that Jan 2000 price just a couple years later.
i think GOOG may be like QCOM the past 7 years, where the fundamentals work out great but the stock goes down anyway because it was so overvalued. that is, imo, a 95% BEST case scenario. 99% is, imo, Meeker's scenario. |
