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Tuesday, June 21, 2005

Hussman takes another shot at Google (GOOG)

John Hussman, manager of the Hussman Strategic Growth Fund (ticker: HSGFX), took another shot at Google (ticker: GOOG) in his latest weekly letter. Extracts:

...we know that the highest price/revenue ratio for any stock with revenues over $100 billion is currently 2.4, that stock being General Electric. We also know that the two highest price/revenue ratios, among all stocks with revenues over $20 billion, are 6.9 and 5.1, for Microsoft and Cisco Systems, respectively. (Google currently sports a price/revenue ratio of 20.5 on $3.8 billion of revenues.)

...we know that total global advertising – television, radio, magazines, newspapers, billboards, and so forth represents about $350 billion at present, and is projected to grow about as fast as the global economy in the future, about 6.5% annually, according to PriceWaterhouse Coopers.

Total internet advertising is currently about 6% of that total, but let's project that 15 years from now, the internet share booms to 20% of all global advertising. Let's also assume that Google gets 75% of it. That's right, baby. 75%.

That puts Google's revenues 15 years from now at $135 billion a year, which is close to those of GE. Let's also assume that stock market valuations remain at a permanently high plateau, and that Google gets awarded the same rich price/revenue ratio of 2.4 that the market awards to GE, which again, is the most generous price/revenue ratio awarded to any  stock with revenues over $100 billion.

We now have everything we need to calculate the expected return to investors:

Price_future / Price_today = (Rev_future / Rev_today) x (P/Rev_future / P/Rev_today)

= ($135 billion / $3.8 billion) x (2.4 / 20.5) = 4.159

Which implies an annual return on Google of [ 4.159 ^ (1/15) – 1 = ] 9.97% annually.

Bummer.

What if Google is the “next” Microsoft and Cisco Systems? Well, MSFT has about $38.9 billion in revenues, and CSCO about $24.2 billion. So $31.6 billion on average, with an average price/revenue multiple of 6.0.

Let's assume that Google gets there in just 10 years. Do the math:

($31.6 /$3.8) x (6.0 / 20.5) = 2.434, which implies an annual return of 9.30% annually.

Suffice it to say that even taking as given  that Google is, in fact, the next GE, Microsoft and Cisco Systems, investors buying the stock at its current price aren't in for big returns.

...when enormously optimistic growth assumptions still imply pedestrian returns, thoughtful investors might want to stand clear.

Full article here.

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Posted by David Jackson on June 21, 2005 at 12:36 AM in Sub-sector: Search, ticker: GOOG | Permalink

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Comments

what is the short position that hussman has?

Posted by: matt | June 21, 2005 02:32 AM

Matt,
John Hussman states in his article that he has no short position in Google. The Hussman Fund is a mutual fund which hedges with index options, so he never has short positions or put options in individual stocks, as far as I know.
David

Posted by: David Jackson | June 21, 2005 08:31 AM

So, this guy mathematically figures that Google is going to $4,159...& that's a bad thing?

Think of the money to be made on the GOOG LEAPs!!

Posted by: One Way Stox | June 22, 2005 10:57 AM

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