Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Pastimes : Clown-Free Zone... sorry, no clowns allowed -- Ignore unavailable to you. Want to Upgrade?

To: Lucretius who wrote (307389)	5/23/2005 12:55:01 PM
From: orkrious	Read Replies (3) \| Respond to of 436258

Google Still Looks Cheap, Not Absurd By James J. Cramer RealMoney.com Columnist 5/23/2005 11:59 AM EDT Click here for more stories by James J. Cramer thestreet.com Those who hate Google (GOOG:Nasdaq - commentary - research) because it is a dot-com now have missed out on 70 straight points of goodness. It's time to ask whether their methodology is flawed or whether we simply are in another mania. I believe it's the former. I believe that because, having been deeply involved in the original dot-com bubble, all I can say is that Google has one of the best earnings profiles I have ever seen, with some of the best gross margins and some of the most enviable rates of return imaginable. But let's look at it a different way. Let's say that Google were a soft-drink company instead of a software company. Just humor me. How would you value it? You first would look at the compares, Coke (KO:NYSE - commentary - research) and Pepsi (PEP:NYSE - commentary - research). Coke sells at 21 times earnings and grows at 8%. Pepsi sells at 23 times earnings and grows at 10%. Neither is experiencing accelerating revenue growth. Google's growing at 33% and is experiencing accelerating revenue growth. Google grows at 4 times Coke's rate. It grows at 3.3 times Pepsi's rate. Shouldn't its multiple on earnings be 3 times better? I think that's reasonable. Google could earn $7 per share next year. Let's give it 3 times Coke's multiple; it's a major brand, well-known, well-run, has a good balance sheet. All the stuff that Google has besides that is growth. Multiply Coke's 21 multiple by 3 and you get 63. Multiply Google's possible 2006 earnings per share of $7 by 63 and you get $441. Now, if I were to go on television and say that Google's still cheap at $250 because it sells at a discount to its comps, people would laugh at me. I might not even be able to get that statement by the legal department, in this post-Henry Blodget world, even though 1. I believe it, 2. I am not getting any money from anywhere to say it and 3. it actually costs me to say it because I don't own it but I may need my lawyer to argue that it's OK to do so. Let's take a step further. How about those who think that Google's a big joke and doesn't even belong at $250? That's the so-called rigorous thing to say, isn't it? But my problem is that I am stuck with metrics, and I don't know what metric to use to show that Google is a joke. Some metric that says that stocks that sell at $250 are stupidly priced? Some metric that says that stocks that sell at 35 times next year's earnings -- which are almost here -- are mistakenly priced? That no stock should ever sell for more than a market multiple? That no company is better than any other company? Yet, here I am, the bull, being on the defensive, even though six months ago, on air, on CBNC's "Power Lunch," I said that this stock would go to $250 and I was laughed at? Oh, go back to the tape; it was the old "wacky Cramer" or the "nutty Cramer" saying "$250" because he hadn't learned the dot-com lesson. Nonsense. I think I was the one who did learn the dot-com lesson, the lesson that said that earnings, not eyeballs, mattered, that profits are the fuel of stocks, not impressions. OK, that's life. People scoffed when I said it and derided me and that comes with the territory. I don't expect them to heap praises on me now. But I do expect them to take me seriously when I say that this stock is not stopping here and is going to $280 because a 40 multiple on $7 seems reasonable. That would be asking too much, though. They still are trying to forget that they poked fun at me for my $250 target. I guess the arrows in my back that say $250 keep me from forgetting that target as easily as they do. It still is so much easier to be a bear on Google than a bull. There's just no memory for who was right. Only a memory for how absurd Google is at $250, just as it was absurd at $160, $170 and $180. No wonder it's so hard to make money around here.