Careful What You Pay For

By DAVID MOON, Moon Capital Management.
September 4, 2005

Jim Cramer is the host of Mad Money on CNBC. The program is well titled. Sometimes Cramer seems angry; at other times I'm convinced he's crazy. Either way, he's mad. If you've never seen it, Cramer is sort of like a smaller version of John Madden, but on some kind of medication.

On a recent show, Cramer screamed that Google, the purveyors of the wildly popular Internet search engine, would increase from a recent price of $280 to $350.

In the short-term, the price of the stock can be influenced by just about anything, including psychology, weather, or how loudly Jim Cramer shouts about it on his show. Heck, there is a part of me that believes that the stock price will exceed $350 at some time in the near future. If so, it will be because of speculation, not the value of Google's business.

Google's revenues are growing very quickly. However, the rate of revenue growth is decreasing every year. As a company gets larger, it is more difficult to maintain extraordinary revenue growth. It happened to Cisco. It happened to Microsoft. It happened to eBay. It happened to Amazon. It will happen to Google.

(It is interesting to note that Cisco, Microsoft, eBay and Amazon, each of which is the undisputed leader in its respective industry, all have current stock prices somewhere from 32 to 76 percent below their all-time highs. Each company illustrates what can happen when investors get whipped into euphoria about stock prices instead of business values.)

Google just announced it plans to issue an additional 14.2 million shares of stock, increasing its Class A share count by 8 percent. Do you want to be buying the stock while the company is selling it? If Google needs the cash to pursue an acquisition, it must be planning a whopper. Before this new stock offering, the company already sits on almost $3 billion in cash. If leveraged 10 to 1, Google has the cash and capacity to do a $30 billion acquisition. That's four times enough money to buy EW Scripps (the holding company for this newspaper, HGTV and all sorts of other media properties.) With the added proceeds from these newly issued shares, Google could conceivably purchase both Boeing and John Deere. Or Hershey Foods and Gillette. Or Comcast. (Does everyone remember the AOL Time Warner Debacle?) Maybe there is another reason for Google to sell these shares. In the last 12 months, Google shares have increased 180 percent. Is it possible the company simply wants to sell some shares at these high prices?

Our buddy Jim Cramer had this recent comment to make about Google: 'If I was a value guy, I would say this [Google] is worth $185. But value guys don't have to perform. Growth managers have to perform." I'm not sure exactly what that means, except that Cramer doesn't hold value investors in very high esteem.

To be sure, there is no guarantee that an overpriced stock will ever be correctly priced. Google might go up to $350. Its price may never have any relationship with the underlying value of the business. But is that a bet worth making?

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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