Thursday, June 09, 2005


What's Google worth?

Down $500 today. What's Google really worth? Well, if you listen to Cramer, the answer is simple: $350. But let's stand back a minute and ask a more general question: how do you decide how much a company ought to be worth? If you believe that in the long-run, fundamentals determine a stock's price, then the answer should be: the value of company should equal the present value of the cash that the company will return to shareholders over its existence, both in the form of dividends and buybacks. But the problem is that a company's ability to pay dividends and buy back stock will depend on how successful the company is, and that's not easy to gauge, especially for stocks like Google.

The future is impossible to know. It is possible that Google will continue to be the marquee company that is today. It's also possible that another company will eclipse Google's technology (remember AltaVista?). Currently, Google has a market cap of $80 billion. It may turn out that the present value of the cash that Google returns to shareholders will end up exceeding that number, in which case Google's stock is undervalued. Of course, Google may end up returning little or no cash back to shareholders, in which case Google is worth little or nothing.

What's the "average" scenario for the future? That's anyone's bet. But $80 billion is a lot of money. And don't forget, that's present value we are talking about. For my money, given the risks involved, Google is not worth anything close to $350. Still, I wouldn't short it here considering the momentum the stock is showing. But if the stock starts to break down, then I say "short away".

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