Saturday, February 3, 2007
Timing is everything in life. Yesterday morning for those of you check the blog you saw a piece I did on Google and it's prospects. Read it here. Last month, well before Google reported their most recent earnings I said unequivocally that people ought to get off the Google bandwagon (Google, When Will Reality Hit). This view was in direct opposition to CNBC's Jim Cramer who for years has been a relentless bull on Google. He has been so bullish and blinded by Google's past success, I swore to people he must have been on Google's payroll. On Dec. 21. 2006 he predicted "It goes down, does nothing, does nothing - and then boom, it reports a good quarter, and then you just make all your money. That's going to happen again. We're just drifting until they report their quarter". Continuing on the Google magic carpet ride on Jan 12 he said, "$513 is now the magic level. If we take out $513, we should have a quick short squeeze, because the double top clowns, who are technicians, have been saying that it can't reach $513. When it does, it's off to the races. That will happen next week. The Google $520 calls are predicting that. Right now, I'd make the move and schnitzel some common. "Schnitzel some common"? I do not know what that means but I think it would hurt. In his opening segment on Thursday, Feb. 1 (he was talking about overpriced SBUX shares and yes I had already blogged the same theme here) Jim said of Google "It can still trade at $600 and not be expensive". Actually it would make it 20% more expensive than its current $481 price, wouldn't it? In short, I cannot find anywhere in the past where Cramer has ever called for a fall in the price of Google shares .
You can only imagine my surprise Friday night while watching Cramer's show I heard my arguments calling for the price of Google shares to go down in the next year coming out of his mouth almost verbatim! At first I thought he was going to mock those arguments and dismiss them (as he always had in the past to any negativity toward Google), but to my surprise he actually embraced them. He called for the price of Google's shares to fall to around $450. What? He did cover his butt (so as to not pull too big a flip flop in 24 hours) and say it will eventually hit $600. He did not provide a time frame for this though. I do think Google may eventually hit $600 (math check: that is only about 21% higher folks), I just think it will be years from now. This was only 24 hours after he said $600 was "not expensive" and about 12 hours after my second Google blog hit reinforcing the initial one that called for a Google price drop to "about $450". Let compare both my blog posts on Google and Cramer's show Friday night.
From the Mad Money recap (2/2 show) on The Street.com "However, Google, which had 99% growth last year, is now decelerating, demonstrating 40% growth, Cramer said. Even though 40% growth is still "remarkable," money mangers make the rules and they don't go after decelerating growth," he said.
From Value Plays on Friday morning "The first thing that sticks out is the deceleration of both revenues and profits. This means that the premium (PE ratio) investors will pay for the stock must fall also." and "Investors rarely pay a premium over the current growth rate for a company with decelerating earnings. This means that 40 times earnings and under is the more likely scenario."
From Mad Money on CNBC Friday: "Google has gotten so big its revenue and earnings have to slow down, the law of large numbers"
From Value Plays on 1/22: "Google cannot continue to grow at this clip. The law of large numbers tell us that at a certain point, percentage growth cannot continue."
Again from The Street.com "Google should go down to $450 before it bounces back, Cramer said." Again, no time frame on when it will bounce back.
On 1/22 from Value Plays "If that rate this year is around 30% expect the pe to shrink to about 30 times 2007 earnings. That gives us a price for Google shares of about $450 a share."
You are probably thinking my post is just "common sense". Of course if earnings and revenue growth slow on a high priced stock, the premium on it must fall and by default so will the price. Cramer was just stating the obvious. I would answer that most things that eventually turn out correct usually are "common sense" in hindsight but were not necessarily though to be so at the time. Consider, at least eight analysts raised their price targets for Google shares on Thursday after earnings were released. Included in this group were analysts at Goldman Sachs, Merrill Lynch, UBS, RBC Capital Markets and Prudential. So, we would have to conclude that my "common sense" conclusion that Google shares are over priced is not all that "common". Let's also not forget that in the shows leading up to Friday's these views had not been espoused by Cramer.
Now, as I said in the beginning, timing in life is everything. Had Jim done this same show a month from now I probably would have not noticed or just chastised him for finally "seeing the light". However, the timing of the show and it's identical reasoning have me wondering. I know all the information is public and anybody could come to the same conclusions (although they aren't, maybe that is another post). But, to have Google's #1 cheerleader do an about face in 24 hours.... what is that they say about "walking like a duck"? You know Jim, what you may have done probably saved a lot of people money since I am guessing more people see your show (and act on your recommendations) than read my blog but you could have at least given me some credit. Fear not, Monday will feature the Official Value Plays Portfolio, just in case you need more show talking points....
PS. Can I at least get an on air booyah?
Posted by Todd Sullivan at 6:51 AM