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Ogling Google

The hit dot-com’s IPO seems to present the most attractive stock opportunity in years, but do a little searching and you’ll find potential trouble in the making.

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Google knows more about us—all of us—than any of us know about Google. Search your name on Google and you are liable to find out things about yourself that even you don’t know. Search Google on Google, however, and you can barely learn a thing about the company’s finances. The founders of the company, Stanford Ph.D. pals Larry Page and Sergey Brin, soon to be among the two richest men in the world, have kept a lid on virtually all the information that we typically know about most successful companies, public or private. Even the most knowledgeable analysts I talk to on Wall Street, the ones who know the Yahoo-Microsoft-AOL space better than anyone, don’t know exactly how to value this company. We don’t know if Google has $500 million or $1.5 billon in sales, although I got that outsize range from background discussions with Wall Street analysts, all of whom are fearful of being caught talking about the company lest they jeopardize their chances for a role in its initial public offering, which is expected any day now. We don’t know if Google is making millions of dollars or hundreds of millions of dollars. Or if it’s making any money at all.

Most investors who want this stock, including some of the savviest of hedge-fund types, don’t know how Google makes its money, given that it doesn’t charge for the very thing that we all use Google for: Googling, the proprietary term that has become to searching the Web what Kleenex is to tissues and Xeroxing was to photocopying. All in just a little more than five years’ time. Would-be investors figure that somehow Google’s come up with a way to monetize the process, or will come up with one once it goes public.

Yet, despite that dearth of knowledge, I can’t recall in my lifetime of trading stocks a company that more people want to own shares in than this search-engine company. The IPO for Google is certain to eclipse any other public offering in history, with more fired-up buyers than we had for Microsoft, Apple, Genentech, Yahoo, or Netscape, to recall virtually every deal that generated massive interest before it ever came to the market.

To call Google the single most anticipated deal of all time is, amazingly, an understatement. The desire to own Google is so overwhelming that it would not surprise me if, the day Google comes public, it is valued at more than just about any public company in the United States, save a handful of giants.

And Google could be worth every penny, at least the pennies that the investment bankers are pitching it for, although it may not be worth what it ultimately ends up trading for. That’s because the disparity between where the bankers price the IPO and where it opens could be the largest gulf in the history of IPOs, in part because neither the government nor the industry has done a thing to fix a system that broke down and descended into corruption and stupidity during the dot-com heyday. Put simply, Google could end up being the biggest IPO, and the biggest IPO train wreck, in history.

But before i explain why you might want to be a seller of Google the stock, even as you want to be a buyer of Google the company, let me explain how Google could mint money in the next few years. Google’s an SFO company, meaning it is in the “search, find, and obtain” business. That’s one of the most lucrative businesses in the world, because it is so commonsensical and logical (think of Google as the first Vulcan company).

“Google could be the biggest IPO, and the biggest IPO train wreck, in history.”

Google makes much of its money by matching advertising with your search. Given that your search is already a terrific lead in itself, any advertiser would love to have your eyes glance at its ads, because you are precisely who it has been spending billions trying to reach, in hit-or-miss style, with all other media. The return on investment from advertising with Google or with sites that are powered by Google’s search engine is phenomenal, because you don’t have to pay unless people click. Can you imagine if the advertiser opposite this article didn’t have to pay New York Magazine if you didn’t pay attention to it? Think about how much more the advertiser would be willing to pay if he could have that guarantee. It’s routine with SFO, whether it be with Google or Yahoo, its principal competitor.

Given that Yahoo is public, we can do some back-of-the-envelope calculations of what Google might be worth, since these two companies have much of the market to themselves in almost 50-50 fashion. Right now, Yahoo generates $2.2 billion in sales and $800 million in ebitda profits and is growing at about 30 percent per year. The market values Yahoo at $37 billion.  My sources indicate that Google will have about $1.2 billion in sales and $250 million in profits in 2004. Again, no one outside the company has seen the books, but my contacts near the company suggest that these numbers, higher than what most analysts are thinking, could be conservative. That would mean Google, which is also reported to be growing as fast as Yahoo, would be worth a little more than half of what Yahoo is worth based on revs, and more than a quarter of Yahoo’s worth based on profits. So let’s peg Google’s worth at somewhere between $10 billion and $18 billion. Google’s just starting its own free e-mail system with vastly more storage space than its competitors and paid advertising on its borders—again using SFO technology to place ads that go with what you write about (privacy watchdogs will be howling, but Google claims that only machines, not humans, will read your mail, and why should you care what a machine thinks about you?). And Google’s rolling out Froogle, a shopping service that lets users search hundreds of popular stores for a given product, all on the same site. So, I think those new additions will create enough worth to hit the high end of that $10 billion–to–$18 billion range.

But what a company is worth and what a company sells at are two radically different issues, as we learned from the moronic dot-com-mania days. Google had originally toyed with the idea of doing a dot-com auction, eBay-like, for its shares, because the owners reportedly thought the IPO system inherently corrupt. Good thinking: It is. Wall Street’s allocation system favors not the real users and lovers of the Google system but the investment banks’ biggest commission generators, who then take the shares and flip them to the clueless masses using market orders on the opening of trading. Then Google’s execs dropped such logical talk and decided to seek traditional bankers; Goldman Sachs and Morgan Stanley are rumored to share pole position for the deal.

When you combine the fervid nature of the Google fans with the fact that all Google fans own personal computers attached to the Web and therefore can access their broker with a keystroke, you get the potentially toxic combination of tons of uninformed buyers clamoring for any piece of Google stock that can be had, either on the deal—unlikely, given that the process favors the big boys—or after it starts trading on the open market. That means Google could have one of those bizarre trading patterns we saw at the height of the bubble in 1998 and 1999, when the bankers brought the deal at $25 and the stock opened for trading at three or four times higher than that. The profit accrues to the bankers, who take their 6 percent, and the flippers, who sell their $25 stock to the jovial-but-easily-ripped-off public. Given that the $25 price tag will most likely value the company, using the metrics I traced out, to reach the high end of the $18 billion range, it would not surprise me to see the company’s capitalization at a staggering $60 billion—almost twice Yahoo’s worth—despite Google’s relatively unproven business model. In other words, the deal’s a buy if you can get some on the offering and a sell where it opens!

So, should you buy Google? The answer is simple: yes, if you can get in on the IPO with the bankers, so start the commissions coming (although you’ll be competing with the Alliances and Fidelities of the world, which do hundreds of millions in commissions, so good luck). And no if you have to buy it in the so-called aftermarket, because the yahoos—pun intended—who buy the stock will have severely overpaid, because the market can’t price in all of those market orders effectively without wildly distorting the opening. Eventually, you can expect the stock to drift down, like many of even the best stocks of the dot-com age, but don’t count on it to ever go through its initial price, in part because the betting here is that Microsoft was shown that price to buy the whole company and passed, but wouldn’t pass again if the stock traded through it.

Google, the company, may be the real deal, but Google the stock may just show us a return to the bubble days that we all thought had mercifully been put behind us. Or, to put it another way, Google, now synonymous with “to search,” could, the moment it opens for trading, become synonymous with “to fleece.”

James J. Cramer is co-founder of TheStreet.com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time.


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