While I congratulate Mark Zuckerberg on being named Time's person of the year it makes me wonder whether we have taken our social networking euphoria to bubble extremes. The stock market is salivating over a Facebook IPO and from what I read the current valuation is somewhere north of $43 billion. Speculation is that Facebook's current year revenues are around $2 billion. Google's (GOOG) market valuation is almost five times that at $190 billion and current year revenue is about $22 billion. These two Internet behemoths sport a combined market valuation of $230 billion on $23 billion in revenue. There have been times in history when the U.S. stock market traded at a Price to Earnings below 10, less than these companies' combined Price to Sales. That is a rather shocking comparison.
Unreal Expectations
Last week, Wedbush Morgan analyst Lou Kerner raised his rating on Google to Outperform from Neutral and set a $750/share price target for the company's shares, saying:
We are raising our rating and price target on Google based on our belief that mobile and social secular trends are accelerating the growth of time spent online and the growth of global searches. Coupled with the increasing global domination of Android, strong moves in local, rapid market share gains by the Chrome browser, and the potential of Chrome OS, we believe Google is remarkably well positioned to benefit from the major secular trend of our times -- the digitization of human life.
The problem with this thesis is that even as we "digitize" our lives, the population's consumption patterns remain finite. Growth is constrained by the absolute spending power of businesses and consumers. Even if the form of consumption shifts there are still limits on the value attainable. While the market gets creative with new ways to justify higher valuations, remember "price per click" from the first internet bubble, as a company's size increases, growth becomes more difficult. In a recent blog post, author and former venture capitalist Peter Sims talks about the challenges Google faces not to suffer the same fate as every other dominant tech company before it:
The company has run out of easy growth opportunities and must now find big chunks of new revenue. With the core search business maturing, Google increasingly seems to increasingly feel the need to make some "big bets." That is a problem that maturing companies face that CEOs call "the tyranny of large numbers."
Great Companies/Bad Stocks
There is no doubt both Google and Facebook are fantastic and wildly innovative companies that have changed consumers' lives and consumption patterns. What they have not done is changed the rules of investing or altered the limitations posed by a finite economy. Both companies carry massive and historically unprecedented valuations only witnessed in previous stock market bubbles. During the internet bubble of 2000, InfoSpace (INSP) stock traded for $1300, it now fetches $8/share. So while we take a moment to toast Zuckerberg's accomplishments, I wonder if it marks the top of the current iteration of the Internet stock bubble.
Can Google for Facebook grab substantially more of that pie? Mobile plays their way, so I think the answer is that they still have some headroom for a few years, especially as we slowly economically recover.
Google has other areas where they potentially could grow: Products. I could see buying a home "google server" that would be a local cache to all my backed up, virus cleaned by Google, encrypted documents and data in their cloud and served to my speakers, TV, wall displays, smart phones and virtually available to me anywhere. I'd buy that and the peripherals. If the Chrome devices had some local processing storage, such as for image manipulation etc, I'd buy them for my parents so that they'd have protected web browsing but still be able to work on their photos etc. They also have robot driving, huge natural language and image recognition projects. Definite hold their stock and wait and see if they can pull off products.
As for the dystopians: Get real, as soon as we run out of "X", we'll invent "Y" to replace it. Oil will be very cheap in 2050 because no one will be using it.
If i am peering into the future, and want to guess the shape of things, I believe it must be in the context of an energy restrained world.
An "accelerating growth of time spent online" actually fits the model of a world of expensive energy, high unemployment, and even the political unrest we've begun to see around the world.
Yes there is plenty of investment headroom left.
I laugh as I know those clever boys up on Wall street who sell the raffle tickets to the good life, and the new media merchandisers will no doubt make a lot of money off of the dystopian future that awaits us.
It is no wonder they can pay back the initial investment with no interest and make GREATER profit and Administrative Salaries and Bonuses.
Life is GREAT is you do not want a better fair product, simple a higher appreciation of you stock value that is taxed at 0% for appreciation.
Greatest reward for those who take and Contribute nothing to main street economy.
"irrational exhuberance"
We live in a finite world. To everything there is a season.
Duty to the dollar has such a great price to societies prosperity and redemption of the human soul