Tuesday, July 24, 2007

Google: Strong company, inflated stock price - August 6, 2007

Interesting analysis of Google's stock price:

Google: Strong company, inflated stock price - August 6, 2007: "Every company's objective is to earn a return on capital that exceeds its cost of capital. Sounds obvious, but it's remarkable how many managers and even some investors lose sight of that fact. In performing this bedrock task, Google has been a superstar. Its cost of capital has consistently been around 13 percent, while its return on capital for the four quarters that ended March 31 was 52.5 percent. The resulting spread, almost 40 percent, is simply stunning and better than that for 99 percent of the companies in the Russell 3000, says the consulting firm EVA Dimensions.

So what's the problem? Just this: Google's tremendous past has sent investors into a delirium about its future. When you buy a stock, after all, what you're paying for is the future. Specifically, a stream of future profits, in particular what's called economic profit or economic value added (EVA), the dollar amount by which return on capital exceeds the cost of capital. With that in mind, I asked EVA Dimensions to calculate the EVA that Google would have to produce to justify today's stock price.

Here's what it found: To live up to the expectations embedded in its current share price, Google would have to increase its EVA, which was $2.4 billion for the past four quarters, by $"


Post a Comment

<< Home