OK, I'm posting on Google's valuation again. Stupid, right? I've been wrong before. But this thing seems awfully juicy to me. Exuberant, even. Is it "irrationally exuberant"? Who knows? Regardless, I think it's useful to put things in perspective.
Google (Nasdaq: GOOG) now has a market capitalization of about $200 billion, give or take $100 million or so with every tick of the stock market. For comparison's sake, The Boeing Company, which sold about $66 billion worth of airplanes, parts, and services over the last 12 months, has a market capitalization of $72 billion. Google's market capitalization is now nearly half of that of GE's, which stands at about $386 billion. GE has $173 billion in revenue; Google has about $15 billion. (To see how Google ranks compared to other technology companies, go here – it's in the big green box in the lower right corner.)
Are you ready to play the Google Market Cap game? Which of the following contains the company or combination of companies that add up to more than Google's total market capitalization (Google's market cap was approximately $202 billion as of Monday's close):
(A) Cisco Systems and Ford Motor Co. (B) IBM, Hershey, and Alcatel-Lucent (C) PetroChina (D) American Express, Walt Disney, and eBay (E) 3M, Eli Lilly, JDS Uniphase, Juniper Networks, and Yahoo
(Answer below)
The answer is: (C) PetroChina*
Here are the total market caps of all combinations:
For reference, here are some more market capitalizations of some large, well known global companies, including the ones that were used in the above comparison (prices as of 3:30 p.m. Monday, Nov. 11):
PetroChina: $400 billion – $1 trillion
Microsoft: $314 billion
Cisco: $180 billion
Pfizer: $158 billion
Intel: $149 billion
IBM: $141 billion
Merck & Co: $122 billion
Boeing: $72.28 billion
American Express: $66 billion
Walt Disney: $63 billion
Eli Lilly: $59 billion
3M: $57 billion
eBay: $44 billion
Yahoo: $34 billion
Alcatel-Lucent: $18.34 billion
Ford: $16.5 billion
Juniper Networks: $15 billion
Hershey: $9.4 billion
JDS Uniphase: $3 billion
Now, I know what you're going to say: Comparisons to the Boeings and the GEs of the world aren't really fair, because those are relatively slow-growing industrial companies. True. Make no doubt about it, Google is growing fast (more than 50 percent per year, at the last count), and it's an extremely profitable company, churning out about $4 billion in profits over the last twelve months. The argument I've made in the past – and so far I've been wrong – is that with the law of large numbers, revenue and profit growth will slow dramatically at some point in the near future, which will eventually make that $200 billion in market cap look daunting.
— R. Scott Raynovich, Editor in Chief, Light Reading
* The Wall Street Journalexplored the valuation of PetroChina following its IPO on the Shanghai stock market last week. Because of the difficulty in valuing shares of a Chinese company that floats on multiple markets, only estimates could be obtained. Most estimates value the shares somewhere between $420 billion and $1 trillion (yes, trillion). However you slice it, it's definitely bigger than Google – and the only one of the five options above that is so.
Yes, but even if Google is earning $40 per share, I'm not earning anything, right? What's my investment doing for me? The whole notion of 'shareholder value' is what we call in dutch 'gebakken lucht' (fried air). I can only bet that someone will buy my shares for more than what I've paid for it. Then what does the buyer have? The same thing I started with: nothing but a speculative value. I find it quite astonishing that this works the way it does.
Wouldn't a company's profits as a percentage of market cap be the main figure of merit? I'm guessing Google has a much higher profit margin than companies like Boeing or GE who are vary capital intensive, and have high costs for labor and raw materials, etc.
How do you determine the value of a company? I'm not that much into accountancy, but I'm a pretty decent pragmatic, so let's do a little exercise: If I'm sitting on $10 million of cash, and I decide to buy a private company, I'd be looking at how much net income that company would generate for me. Anything less than 5% per year wouldn't do, even in a stable market; I'd rather put my money in the bank. If the market is more volatile I'd want at least a 10-20% annual yield, to make sure I get my investment back before the market dries up or the competition takes over, and I'm left with just the value of the fixed assets minus liabilities.
Now the stock market is a different ball game that I haven't quite figured out why it works the way it does. If you own stock in a company you only share in a minor part of the profits through dividends, and for the rest you have to speculate that the value of your shares goes up, driven by... what, actually? The belief of other people some time in the future that the price of the shares will grow even further? Sounds a bit fishy if you ask me, but the fact is that it works and people are taking it for granted. I'd just have a hard time explaining to a visiting extraterrestrial how people can make money by buying something that is really nothing, and then later selling it at a profit. Besides this speculation on gullibility, how can you assign any value to shares in the first place?
Maybe a different way of looking at this would be to look at companies which have a revenue to market cap relationship of about 1:10.
To do that research would require some effort, far more than quickly typing a response, but it's worth at least keeping an eye out. One company that immediately comes to mind is Facebook, which isn't publicly traded but is showing annual revenues of about 10 percent of what is perceived to be the value of the company.
Similar kind of company, I guess, and similar value logic, maybe. Historically, information companies have gained value over asset-based companies. SABR grew in value that exceeded American Airlines, so a list of flights was worth more than the the company doing the flying.
While the valuation seems to be off, it is impressive that Google and Facebook are so adept at mining that valuation. I suppose the million-dollar question, or the $200 billion question, is could the bottom fall out of that valuation? Surely, the answer is yes, but short of an entire market metldown, it seems like someone will have to emerge with metrics that force everyone to look at Google differently before that will happen.
Google could do that to themselves with its mobile phone plans. Often, Google has bounced into white space industries. The mobile phone market, and the mobile handset market, and the smartphone software market are all pretty well established. Pushing against those companies could lead to some recalibration of value.
Or, maybe not--you might be posting a year from now adding 4 of the companies you mention to equal Google's value......
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