Friday, February 4, 2005


A couple posts on why Google is not a good long-term bet. One is an AlwaysOn post by member, hotjerky, and another is a wire from CBSMarketWatch:

Do Not Buy the Google Hype
While earnings came in ahead of expectations at "the GOOG," Google's achieved growth with one-time gains that will never materialize again.

"Why Google is not a good long-term bet. Throwing cold water on Google's parade"
I hate to be the party pooper amid all the excitement surrounding Google's latest earnings report and the run-up in its stock price to a new high of $216.

But stocks bought when their price-to-earnings ratios are as high as Google's - over 142, using trailing earnings - hardly ever provide an attractive long-term return.

This should not come as a surprise, since it's a matter of simple mathematics.

To illustrate, let's fantasize about where Google will be trading in five years' time. To play along with this fantasy, you need to answer two questions:

Let's tackle the first question first. The stock market historically has produced around a 10 percent return per year on an annualized basis, so that's the best guess of how much you could earn in an index fund between now and early 2010.

Since investing in Google's stock will be much, much riskier than investing in the overall stock market, it will need to provide a return significantly greater than 10 percent annualized in order to compensate investors for this greater risk.

No comments: