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Mathew Ingram

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All I want for Christmas

Mathew Ingram


If you could ask Santa (or Pere Noel, or Ded Moroz, or your holiday gift-giver of choice) to leave you one stock under your tree this Christmas, what would it be? Obviously, any one in their right mind would ask for a single share of Warren Buffett’s holding company Berkshire Hathaway - a stock that has gone up in a virtually unbroken climb for the past 40 years or so, to the point where you now have to pay over $100,000 (U.S.) for a single share.

Thats’s a little much to ask of Santa and his minions, however. If you’re going to do that, why not just cut right to the chase and ask for a Ferrari Testarossa? In the spirit of the season, we should ask for something a little less expensive perhaps, but a stock that still has lots of value. Although it may be getting up there in price itself now -- since it is trading at about $480 -- I’m going to suggest Google as the stock I would like to have in my stocking this season.

But isn’t Google getting close to topping out, you ask? After all, the company is worth close to $150-billion at the moment, ahead of IBM and Intel, well ahead of Coca-Cola and Hewlett-Packard, and (ironically enough) not far behind Berkshire Hathaway itself. At its current level, the stock is selling for more than 60 times the company’s profit per share for the past 12-month period, and close to 16 times its revenue per share for the same period.

Those are some fairly hefty multiples by any measure. Even Yahoo, which is likely one of the closest comparable companies to Google (since it is active in online search, search-related advertising and a number of other similar ventures) is only trading at about 35 times its profit per share for the previous 12 months, and about six times its revenue. Microsoft shares have a P/E ratio of about 25 times, and are selling for about six times sales.

Research In Motion, however -- a company that has been growing at a comparable rate to Google over the past two years - is trading at an even higher P/E ratio than the search company, and its price-to-sales ratio is only slightly lower at about 10 times. Is RIM overvalued at that level? That depends on how quickly it can increase its sales and profitability over the next couple of years. The same question could be asked of Google. If either company can manage to keep up the growth rate that it has turned in over the past few years, then it might prove to be fair value even at its current levels.

That said, there are a couple of things that aren’t acting in Google’s favour. The first is the “law of large numbers,” as some market watchers call it. In other words, Google is so huge in terms of market capitalization that it’s difficult to see how it could continue growing for that much longer, without becoming one of the most highly valued companies in the world. Could it become as valuable as Pfizer ($200-billion), the global drug giant, or Microsoft ($286-billion) or General Electric ($385-billion)? Possibly. But doing so becomes harder and harder the larger Google grows.

That doesn’t mean the company will stop growing, just that investors may not be willing to pay as much for that growth -- which means the stock could grow more slowly, or even fall. Another hurdle is that Google isn’t just a highly valued stock; it has a dominant market share in search-related advertising (about 70 per cent or so according to some estimates) and that means there is also less room for growth than if it was an upstart. Online advertising is growing quickly, however, so the total market pie is also increasing in size, and its dominance means Google is likely to get a greater share.

Obviously, there is also increasing competition in the online search-advertising market coming from Yahoo and Microsoft, both of whom are formidable competitors. But for the moment at least, Google is a dominant force, and there is no reason to think that that will change any time soon. Yahoo’s new search-advertising engine, which was designed to bring its system up to speed, is still unproven - a recent survey showed that Google’s ads draw as much as three times the revenue that similar Yahoo ads do. That is worth a premium.

And while Google’s stock may be trading at historically high multiples right now, and the company may be facing increasing competition, getting a share from Santa (or whoever) means that your total cost of ownership will be zero, right? It doesn’t have to go up all that much to make that look like a good bargain.

Mathew Ingram joined The Globe and Mail's online news team in June of 2000, after spending four years as the Western business columnist, based in Calgary.

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