Google or Gold?
By Rick Aristotle Munarriz
November 30, 2005 | http://www.fool.com/investing/high-growth/2005/11/30/google-or-gold.aspx
What do a share of Google (Nasdaq: GOOG) and an ounce of gold have in common? Well, until recently, neither one appeared to be barreling toward $500. Yet here they are.
It may not seem like a fair comparison. We don’t drape Google medals around bowing heads atop the highest platform at the Olympics. No jeweler will sell you a 14-karat Google necklace. When a music artist sells 500,000 CDs, no one is saying that the record has gone Google.
However, there’s a question I would like you to kick around with me for a few paragraphs: Would you rather own a share of Google or an ounce of gold?
Here’s the stipulation: You have to put your choice under a mattress for the next 10 years. That’s right. I’m taking something as volatile as Google and as cyclical as a gold coin and forcing you into a long-term commitment.
Where do you stand?
Sure, an ounce of gold is worth a bit more than a share of Google at the moment, but let’s just call that an acceptable head start in a race that will cross the finish line on Nov. 30, 2015.
Bowling for bullion
The case for gold can be made on a historical basis. Here was a metal that had its price fixed at $20.65 an ounce through most of the 1800s. It was not until the latter half of the 20th century that trading in gold became a speculative art. Even though gold is trading for less than it fetched when it peaked in 1980, an ounce of gold acquired 34 years ago has appreciated tenfold today.
You don’t even have to be a gold bug to side with the yellow metal. If you truly believe that Google is even moderately overvalued, you may already be looking forward to taking a 10-year nap on top of a gold coin instead of a Google stock certificate. Even if gold simply marches in place, you may think there’s no way that Google will be worth as much 10 years from now as it is today.
You are certainly entitled to that opinion. That’s why I tossed out the question in the first place. Still, let’s now consider Google’s merit as a long-term mint beneath your pillow. Google has never seemed cheap. Since the stock went public a little more than 15 months ago, Google’s first retail investors have been treated to a five-bagger in terms of capital appreciation.
Plenty of sharp market mavens thought that Google was richly priced at its $85 IPO price. Every material uptick seems to bring out even more critics singing a cautionary tune when it comes to Google. I even flashed a bit of bearish near-term concern when three analysts last month brandished new $450 price targets.
The case for Sergey and Larry
My skepticism about Google passing the $450 mark over the next few months — or quarters, even — is starting to feel like runny egg-yolk shampoo lathering up on my scalp. I’m a good trading day or two away from being wrong. I certainly don’t mind owning up to that. However, even with my pessimistic short-term bent, I was still — and am still — bullish on Google in the long term.
That’s because you have to take a lot of the early Google bears in context. This is a company that has gone on to humble prognosticators by blowing Wall Street profit targets to pieces in four of the company’s last five quarters.
In Google, we have a company that has produced $1.3 billion in profits — and $5.3 billion in sales — over the past year. When Google went public with a proposed market cap of $24 billion, there wasn’t a single bearish argument that read, “Avoid this stock because it’s trading at a lofty 18 times forward earnings.” Why? Because nobody ever thought that Google would be the answer to just about every question involving contextual advertising and paid search. Even the optimists didn’t think that Google would be this profitable today. That’s what makes Google so compelling to some and so difficult to cap for others.
Google is more powerful today than it was when it made its market debut in August 2004. It’s also more powerful today than it was this past March, when it had already become such an intimidating force that Microsoft (Nasdaq: MSFT) huddled its key executives together to present an internal briefing titled “The Google Challenge.”
Microsoft is valued as a $300 billion company. Google shares would need to close in on the $1,000 mark to match Mr. Softy’s market cap, and it’s unlikely that Google will lap Microsoft any time soon. Then again, a year ago, few figured that Google would come to be valued more richly than Yahoo! (Nasdaq: YHOO), the larger online portal that took Google under its wing and exposed the world to Google’s algorithmically superior search engine.
Google lapped the online giants in terms of market cap in its first year. Companies such as Stock Advisor recommendations eBay (Nasdaq: EBAY) and Amazon.com (Nasdaq: AMZN) are now tiny figures in Google’s rearview mirror.
The neatest thing about this is that Google’s secret sauce isn’t really all that secret. Sure, the company guards its methods the way KFC or Coke watches over its recipe formulas. However, the company operates the simplest of models and makes no bones about it. With 99% of its revenues stemming from advertising, it’s as simple as selling targeted search campaigns while growing the number of content-specific and search-result pages as quickly as possible.
Back to the original question
So where do you stand? As a member of the Rule Breakers newsletter service, you probably know where I stand (or rest, as the case may be). I’m a fan of ultimate growth stocks, so having seen Google in action and accepting the laundry list of things that can go wrong (like smarter rivals or an outbreak of click fraud), I would make Google my choice as a mattress stuffer.
This is certainly no knock on gold. It’s just that Google is the kind of living corporate organism that fascinates you more and more with every layer that you peel back. If my wife and I were to go for a third child, I’m sort of liking the ring of Google Munarriz.