When the Market Values Hope Over Experience by a Factor of 18
"THREE companies with household names are worth about the same amount now -- at least in the opinion of investors. Google, I.B.M. and Berkshire Hathaway all have market capitalizations in the vicinity of $135 billion.
But if they are equal in value, they are very different in what an investor got for his or her money this week, as is shown in the accompanying charts, which are based on Friday's closing prices.
There are many ways to value an investment. These charts look back at history -- and that is not what Google investors are really interested in. They hope that the company's explosive growth will continue and that Google will become a dominant force in global business.
Still, using that historical approach, an investor who put $10,000 into Google stock this week would have acquired shares with a claim on $96 in profit, and $389 in revenue, over the most recently reported 12 months.
By contrast, a buyer of Berkshire Hathaway, the company run by Warren E. Buffett, would have a claim on $488 in profit, and $5,249 in revenue, over the same period. And I.B.M. looks even cheaper, with the same investment yielding a claim on $634 in profit and $7,017 in revenue. On a price-to-revenue basis, Google is about 18 times as expensive as I.B.M.
It is also a lot more exciting. Only two Wall Street analysts cover Berkshire, whose high share price makes it something less than a widely held stock, and neither of them is recommending the stock. That is in contrast to 23 who follow I.B.M. and the 37 who watch Google, according to data from StarMine.com.
Google is not as expensive as Yahoo, an earlier Internet darling, was when it peaked about six years ago. Then a $10,000 investment in Yahoo, on a historical basis, bought just $42 in revenue and $4 in profit. Its total market value was a little higher than Google's is now, more than $140 billion.
It also had been a better performer. From the end of 1998 through the early January day in 2000 when Yahoo hit what would be its highest closing price so far -- $118.75 adjusted for subsequent splits -- it rose 301 percent. Google, by contrast, was up just 142 percent over a similar period from the end of 2004 to yesterday.
Unlike so many of its rivals for investor affection in 2000, Yahoo remains a valuable company, with revenue and profit that have risen rapidly, much as investors expected then. But while Yahoo is now larger than it was in 2000, its shares trade at lower valuations than they fetched in 2000, and as a result the stock is down 66 percent from that 2000 high.
If Google were to now trade at the same multiple to historic revenue that Yahoo does, it would lose nearly half its value. If it traded at the same multiple to historical earnings, it would fall around 65 percent.
That is not, of course, a forecast. Google's fans expect rapid growth and, so far, those forecasts have proved correct. But the high valuations do serve as a reminder that expectations for a lot of good news are built into Google's stock price. And such expectations, as Yahoo's owners have learned, can fail to come true even when a company does very well.
OFF THE CHARTS"